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/ 


CREDIT  AND   ITS   USES 


CREDIT 
AND    ITS    USES 


BY 


WILLIAM  A.  PRENDERGAST 


D.  APPLETON  AND   COMPANY 

NEW  YORK  AND  LONDON 

1922 


Copyright,  1906,  by 
D.  APPLETON  &  COMPANY 


Printed  in  the  United  States  of  America 


)o  PREFACE 

>  

The  people  who  take  a  deep  interest  in  credit  are  di- 
vided into  two  classes:  first,  those  to  whom  it  appeals  as 
an  interesting  and  necessary  study  in  the  field  of  economic 
-"'  phenomena ;  and  second,  those  who  are  actively  engaged 
•in  dispensing  it,    as  a  vital  complement   of  commercial 
fj  usage  and  requirement. 

^        The  purpose  of  this  work  is  to  demonstrate  the  all- 
powerful  influence  of  credit  in  the  ministration  of  the 
■world's  affairs;  to  explain  the  principles  involved  in  the 
*\  question,  and  to  show  how  its  practical  application  to  mer- 
'Cantile  life  depends  so  completely  on  a  correct  knowledge 
^^and  observance  of  those  principles.     The  writer  appre- 
^  elates  the  delicate  and  important  nature  of  the  task  he  has 
i  attempted  to  perform,  and  offers  this  contribution  to  what 
rf  has  already  been  said  on  the  subject  with  a  realization  of 
^  its  deficiencies, 
rt         During  the  last  ten  years  credit  men  of  banks  and 
business   concerns   have  exhibited  much  interest   in   the 
study  of  credit;  but  in  the  furtherance  of  the  very  com- 
mendable effort  made  by  many  of  them  to  encourage  in- 
vestigations in  it  there  has  always  been  a  disposition  to 
dismiss  the  academic  features  of  the  subject  in  favor  of 
what  are  termed  its  practical  elements.     The  author  has 
sought  to  give  to  both  the  academic  and  practical  sides 
their  full  measure  of  attention,  and  to  accord  to  each  its 
due  prominence.     If  he  has  succeeded  in  doing  so  he  will 
feel  that  his  labors  have  not  been  without  favorable  result 


Vi  PREFACE 

In  the  preparation  of  Parts  III  and  IV,  and  also 
Chapter  XIX  of  the  book,  which  are  concerned  with  the 
administration  of  credits  and  the  question  of  credit  insur- 
ance, the  writer  has  asked  the  views  of  active  and  practical 
credit  men  in  every  section  of  the  country — this  in  justice 
to  those  who  will  do  him  the  honor  of  reading  the  book, 
and  especially  to  those  who  desire  to  familiarize  them- 
selves with  the  duties  of  credit  work.  Although  the  writer 
has  been  a  credit  man,  he  considers  that  in  offering  a  book 
of  this  character  to  the  public  it  would  not  be  proper  to 
confine  himself  solely  to  his  own  experiences  or  opinions ; 
but,  in  the  interests  of  a  broad  discussion  of  credit  dis- 
tribution and  management,  he  should  add  to  them,  wher- 
ever necessary,  a  statement  of  the  methods  of  others,  in 
order  that  no  ideas  worthy  of  recording  might  be  over- 
looked. In  every  instance,  however,  where  conclusions  are 
drawn  they  are  the  author's  own. 

The  writer  takes  this  formal  and  public  means  of  ex- 
pressing to  all  those  who  have  so  considerately  helped  him 
by  their  counsel  his  very  heartfelt  sense  of  obligation. 
The  number  of  those  who  belong  in  this  category  is  too 
large  to  permit  the  mention  of  the  individual  names,  a 
condition  which  the  writer  regrets.  A  specially  cordial 
word  of  thanks,  however,  is  due  to  Mr.  James  G.  Cannon, 
Vice  President  of  the  Fourth  National  Bank  of  Xew 
York,  for  the  opportunity  afforded  the  writer  to  use  the 
facilities  of  the  credit  department  of  that  institution  in 
preparing  the  material  for  the  chapter  on  "  The  Credit 
Department  in  Banking  Credit,"  and  also  the  forms  in- 
corporated in  that  chapter. 

W.  A.  P. 


M 


/ 


CONTENTS 


PART  I.    CREDIT:  ITS  FUNCTION  AND  ORGANIZATION 

CHAPTER  PAGB 

I.    The  Theory  of  Credit 3 

II.    The  Credit  System 16 


PART  II.    PRIMARY  DIVISIONS  OF  CREDIT 

m.    Banking  Credit 35 

IV.    Capital  Credit 49 

V.    Public  Credit:  National,  State,  and  Municipal 

Credit 68 

VI.    Individual  or  Personal  Credit        ....       82 

VII.    Commercial  Credit 99 

PART  III.  THE  CREDIT  DEPARTMENT  AND  SOURCES 
OF  CREDIT  INFORMATION 

VIII.    The  Credit  Department  in  Banking  Credit        .     121 

IX.    Sources  of  Credit  Information  (A):  Salesmen's, 

Attorneys',  and  Bank  Reports    ....     150 

X.  Sources  of  Credit  Information  (B):  Written 
References  and  Inquiry  Forms. — Written  and 
Signed  Statements. — Oral  Investigations. — 
Traveling  Credit  Representatives  and  Special 

Reports 177 

rii 


Viii  CONTENTS 

CKAPTES  VAOB 

XI.  Sources  of  Credit  Information  (C):  The  Mer- 
cantile Agency 190 

XII.    Sources    of    Credit    Information    (D):  Credit 

Cooperative  Methods 203 

PART  IV.    CREDIT-OFFICE  ADMINISTRATION 

Xlli.    The  Analysis  of  Credits:    (A)  The  Elements 

of  Credit. — (B)  Quick  and  Fixed  Assets      .     219 

XIV,  Methods  for  Safeguarding  Credits:  (A)  Gen- 
eral Expenses  with  Special  Reference  to 
Rent. — (B)  "Credit  Lines  and  Limitations." 
— (C)  Fire  Insurance  and  Its  Relation  to 
Credit. — (D)  Comparative  Statement  Forms    233 

XV.  The  Credit  Man  :  Duties,  Methods,  and  Charac- 
teristics      251 

XVI.  Collections  (A):  Collections,  Their  Nature. — 
Systematic  Methods. — Unfavorable  Develop- 
ments, Their  Effects  upon  Further  Credit. — 
Treatment  of  Tardy  Accounts. — Collections 
Through  Drafts,  Draft  Systems      .       .       .     263 

XVII.  Collections  (B):  Collection  Letters. — At- 
torneys-at-Law  as  Collectors. — Adjustment 
Bureaus  or  Administration  by  Creditors. — 
Suspended  Accounts 281 

PART  V.    GENERAL  QUESTIONS 
XVIII.    Legal  Redress:  The  Bankruptcy  Act        .       ,     297 

XIX.    The  Effort  to  Systematize  Protection  from 

Credit  Losses:  Credit  Insurance     .       ,       ,     323 

XX.  Organization  and  Educational  Movements  in 
Credit:  (A)  Organization  for  the  Improve- 
ment OF  Conditions  ArFEcrma  Credit. — (B) 
The  Study  of  Credit 334 

Index 343 


LIST  OF  FORMS 


9)RU  PAGB 

1, — Form  used  when  an  account  is  being  opened     ....  126 

2. — Property  Statement  Form  to  be  used  by  a  firm  in  making 

a  statement  of  its  affairs  to  a  bank         .        .        .       facing  128 

3. — Property  Statement  Form — a  style  different  from   Form  2 

facing  130 

4. — Property  Statement  Fonn  for  use  of  corporations  .  facing  132 
5. — Property  Statement  Form  for  use   of   corporations — a  style 

different  from  Form  4 facing  134 

6. — General  form  of  inquiry  letter 135 

7. — General  form  of  inquiry  letter  addressed  to  banks    .        .        .   136 

8. — Form  of  Collateral  Note facing  136 

9. — Form  of  letter  used  by  banks  when  making  revisions  of 

credit  information 138 

10. — Comparative  Statement  Form  or  comparison  of  statements 

facing  138 

11. — Property  Statement  Form  used   by  a  bank   in  making  a 

statement  of  its  affairs facing  140 

12. — A  briefer  form  used  by  a  bank  in  making  a  statement  of  its 

affairs facing  142 

13. — Form  used  by  a  Banking  Credit  Department  for  listing  bills 

receivable  offered  as  collateral 143 

14. — Form  of  letter  used  when  revising  credit  information  in  re- 
gard to  banks 144 

15. — ^Form  used  in  a  bank  to  show  the  general  state  of  a  borrow- 
er's account  when  a  loan  is  under  consideration   .        .        .   145 

16. — Index  card  showing  the  name  of  a  customer  or  correspondent 

of  a  bank,  and  also  Mercantile  Agency  ratings      .        .        .   147 

17. — Form  for  the  use  of  salesmen  in  furnishing  credit  information  155 

17A. — Reverse  side  of  Form  17 156 

ix 


X  LIST  OF  FORMS 

FORU  PAOI 

18. — Brief  form  for  use  of  salesmen  in  furnishing  credit  information  159 

19. — Attorneys'  Report  Blank 167 

19A. — Reverse  side  of  Form  19 168 

20.— Trade  Inquiry  Form 179 

21. — A  Property  Statement  Form  adopted  and  reconunended  by 

the  National  Association  of  Credit  Men  .        .        .       facing  182 

22. — Property  Statement  Form  of  style  different  from  Form  21     . 

facing  184 

23. — Type  of  Inquiry  Ticket  in  Credit  CoSperative  Bureau  work   .  209 

24. — Daily  Experience  Form  used  by  Credit  Co6perative  Bureau  . 

facing  210 
25. — System  of  Remarks  used  by  Merchants'  Credit  Association    . 

facing  212 


BIBLIOGRAPHY 


American  Commonwealth,  The.    James  Bryce. 

American  Government,  The.     B.  A.  Hinsdale. 

Ancient  Law.     Henry  Sumner  Maine. 

Collier  on  Bankruptcy  (Fifth  Edition).     William  H.  Hotchkiss. 

Constitutional  Limitations.     Thomas  M.  Cooley, 

Credit.     J.  Laurence  Laughlin. 

Credit,  Its  Meaning  and  Moment.     Clark  W.  Bryan. 

Credit  Man  and  His  Work,  The.     E.  St.  Elmo  Lewis. 

Credit  System  in  France,  Great  Britain,  and  the  United  States,  The. 

Henry  C.  Carey. 
Credits,  Collections  and  Their  Management.     William  H.  Preston. 
Democracy  in  America.     Alexis  de  Tocqueville. 
Economics  for  Beginners.     Mrs.  Millicent  Garrett  Fawcett. 
Federalist,  The. 

Funds  and  Their  Uses.     Frederick  A.  Cleveland. 
Giving  and  Getting  Credit.     Frederick  B.  Goddard. 
History  of  Europe  during  the  Middle  Ages.     Henry  Hallam. 
Industries  and  Wealth  of  Natioris.     Michael  G.  Mulhall. 
Inquiry  Into  the  Nature  and  Effects  of  the  Paper  Credit  of  Great 

Britain,  An.     Henry  Thornton. 
Introduction  to  the  ConstitiUional  Law  of  the   United  States,  An. 

John  Norton  Pomeroy. 
Introduction  to  the  Study  of  Economics.     Richard  T.  Ely. 
Lectures  on  Commerce.     Edited  by  Henry  Rand  Hatfield. 
Loan  Credit  in  Modern  Business.     Thorstein  B.  Veblin. 
Lombard  Street.    Walter  Bagehot. 
Modem  Bank,  The.    A.  K.  Fiske. 
Money  and  Banking.     Horace  White. 
Money  and  Credit.    Wilbur  Aldrich. 

xi 


Xii  BIBLIOGRAPHY 

Outlines  of  Economics.    C.  J.  Bullock. 

Physics  and  Politics.     Walter  Bagehot. 

Practical  Treatise  on  Business,  A.     Edwin  T.  Freedley. 

presidential  Problems.     Grover  Cleveland. 

Principles  of  Political  Economy.     John  Stuart  Mill. 

Sketch  of  an  Act  to  Establish  a  Uniform   System  of  Bankruptcy 

Throughout  the  United  States.     John  Lowell. 
Spirit  of  Laws.     Charles  de  Secondat  Montesquieu. 
Theory  of  Credit,  The.     Henry  Dunning  Macleod. 
Trust  Problem,  The.     Jeremiah  W.  Jenks. 
Ways  and  Means  of  Payment.     Stephen  Colwell. 
Wealth  of  Nations.     Adam  Smith. 
Whom  to  Trust.    P.  R.  Earling. 
Work  of  Wall  Street,  The.    S.  S.  Pratt. 

In  addition  to  the  foregoing  there  has  been  consulted  a  large 
number  of  pamphlets  and  articles  on  credit  and  business  questions, 
as  well  as  official  publications  and  statistical  matter  issued  by 
commercial  organizations. 


PART  ONE 

CREDIT,  ITS  FUNCTION  AND 
ORGANIZATION 


CHAPTER   I 


THE    THEORY    OF    CEEDIT 


The  number  of  those  who  are  affected  either  directly 
or  indirectly  by  the  dispensation  of  credit  represents  a 
very  large  proportion  of  the  inhabitants  of  the  civilized 
world.  In  view  of  the  constantly  expanding  area  and 
influence  of  commerce  and  commercial  customs  which  sub- 
sist mainly  upon  the  operations  of  the  great  organism  of 
credit,  it  could  almost  be  claimed  that  in  these  days,  at 
least,  all  sections  of  the  world,  civilized  and  uncivilized, 
are  susceptible  to  the  subtle  and  lasting  control  which 
credit  diffuses. 

It  is  the  general  acceptation  that  money  and  credit 
constitute  one  of  the  elements  or  branches  of  political 
economy ;  for  this  reason  no  utterance  on  credit  would 
be  adequate  that  did  not  include  at  least  a  reference  to 
this  great  theme.  Political  economy,  or  the  science  of 
economics,  is  variously  defined ;  but  the  differences  refer 
more  to  form  of  expression  than  divergence  of  actual  con- 
ception or  interpretation.  The  meaning  of  the  term  has, 
however,  undergone  considerable  change  in  the  course  of 
the  ages,  as  is  shown  by  the  fact  that  in  its  earliest  use 
it  was  known  among  the  Greeks  as  "  the  art  of  prudent 
and  systematic  household  management."  The  changes 
wrought  by  the  new  institutions  that  rose  upon  the  wrecks 

3 


4  CREDIT  AND  ITS  USES 

of  the  Grecian  and  Roman  systems  of  local  and  state  rule 
broadened  the  scope  of  political  economy  until  it  was  re- 
garded as  embracing  the  more  important  and  extensive 
management  of  state  and  national  affairs,  or  "  the  art  of 
directing  the  incomes,  the  industry,  the  consumption,  and 
expenditures  of  the  State  and  its  subjects  with  frugality 
and  care." 

Political  economy  was  formerly  considered  a  depart- 
ment or  function  of  statesmanship ;  and  the  definition  just 
quoted  will  readily  suggest  why  this  was  so,  as  the  task 
of  directing  the  incomes,  the  industry,  the  consumption, 
and  expenditures  of  the  state  and  its  subjects  should  be 
the  great  and  precious  care  of  those  who  direct  the  des- 
tinies of  nations.  As  one  authority  says,  in  the  nineteenth 
century,  political  economy  was  divorced  from  statesman- 
ship and  came  to  be  looked  upon  as  a  "  neutral  science." 
It  is  also  true  that  since  this  separation  the  science  of 
political  economy  has  made  tremendous  strides,  not  only 
in  the  wealth  of  new  material  brought  forth  by  its  follow- 
ers, but  in  the  influence  their  teachings  have  exercised  upon 
the  multitude.  In  referring  to  this  change  as  having 
taken  place  in  the  last  century,  we  are  not  unmindful  that 
the  first  great  clarion  note  which  announced  the  coming 
of  this  change  was  in  the  form  of  Adam  Smith's  master- 
piece, "  The  Wealth  of  [N^ations,"  which  appeared  in  the 
last  quarter  of  the  eighteenth  century.  We  are  indebted 
to  Messrs.  J.  B.  Say  and  John  Stuart  Mill  (types  of  a 
distinguished  school  of  writers)  for  their  services  in  de- 
fining the  tenets  of  latter-day  political  economy.  Their 
terse  descriptions  of  the  study  as  the  "  Production,  Con- 
sumption, and  Distribution  of  Wealth  "  and  the  "  Pro- 
duction, Distribution,  and  Exchange  of  Wealth,"  respec- 


THE  THEORY  OF  CREDIT  5 

lively,  have  become  familiar  terms  in  the  discussion  of 
social,  economic,  and  political  questions.  There  can  be 
no  question  that  the  lucidity  with  which  they  have  put 
forth  their  views  has  contributed  greatly  to  a  better  com- 
prehension of  the  theories  involved  in  the  rights,  oppor- 
tunities, and  wants  of  mankind ;  and  this  notice,  however 
brief  and  imperfect,  is  a  necessary  adjunct  of  any  writing 
on  credit.  The  relation  of  credit  to  these  quantities  must 
not  be  overlooked  or  disregarded,  especially  by  those  who 
are  its  guardians  and  dispensers.  Before  leaving  this 
branch  of  the  subject,  it  should  be  said  that  the  light  that 
has  been  thrown  upon  the  economic  issues  of  the  past 
hundred  years  from  the  study  of  the  phenomena  which 
constitutes  political  economy,  has  certainly  served  to  make 
a  better,  a  happier,  a  more  contented  people.  It  has  en- 
abled them  to  better  imderstand  their  wants  and  provide 
for  them,  to  better  appreciate  their  rights  and  defend 
them,  to  discern  their  opportunities  and  take  advantage 
of  them;  so  that  we  can  add  what  has  been  so  well  said 
by  others  on  this  point,  that  political  economy  is  the 
"  ordered  knowledge  of  the  social  phenomena  arising  out 
of  man's  activity  in  the  acquisition  and  use  of  wealth." 

In  considering  credit  as  a  science,  we  are  met  by  many 
conflicting  and  contradictory  ideas  and  statements.  A 
number  of  writers  have  regarded  credit  merely  as  one  of 
the  elements  entering  into  the  larger  sphere  of  economics, 
and  not  as  a  separate  and  distinct  entity.  It  has,  in  fact, 
been  a  favorite  remark  of  many  lay  writers,  especially 
business  men  engaged  in  credit  work,  "  that  credit  can 
hardly  be  called  an  exact  science  " ;  but  rarely  has  there 
been  any  substantial  effort  made  to  prove  this  statement 
either  by  reference  to  the  authorities  or  by  personal  argu- 


6  CREDIT  AND  ITS   USES 

ment.  Science  is  "  any  department  of  knowledge  in  which 
the  results  of  investigation  have  been  worked  out  and 
systematized,  an  exact  and  systematic  statement  of  knowl- 
edge concerning  some  subject  or  group  of  subjects."  Are 
we  prepared  to  say  that  the  principles  of  credit  have  been 
worked  out  and  systematized  to  such  an  extent  and  with 
such  precision  that  we  are  warranted  in  claiming  that 
credit  has  been  reduced  to  a  science?  Mr.  Macleod  has 
taken  a  more  advanced  position  on  this  question  than  any 
other  writer,  and  as  is  usual  with  him  makes  his  assertions 
with  extreme  positiveness.  He  claims  that  he  has  worked 
out  the  bearings  and  principles  of  credit  from  the  earliest 
uses  to  the  present  time,  and  brought  the  subject  to  scien- 
tific demonstration.  He  admits  that  this  demonstration 
is  the  outcome  of  the  world's  experience  during  2,238 
years.  In  other  words,  from  the  time  of  the  Romans  to 
his  own  day  the  process  has  involved  the  study  and  exposi- 
tion of  its  methods  and  practices,  the  judicial  interpreta- 
tions of  the  question  in  all  its  forms,  and  the  reduction 
of  the  different  quantities  known  as  credits  or  debts  to 
algebraic  demonstration. 

The  origin  of  credit  dates  back  many  years,  and  at- 
tempts have  been  made  to  mark  it  with  the  honor  of 
extreme  antiquity.  Mr.  Aldrich,  in  his  "  Money  and 
Credit,"  treats  entertainingly  of  the  customs  supposed  to 
be  prevalent  in  Babylon  and  Phoenicia,  from  which  it  is 
shown  that  "  credit  instruments  "  were  to  all  intents  and 
purposes  in  use  in  those  ancient  lands.  There  can  be  no 
question,  however,  that  credit  was  used  by  the  Romans, 
and  Mr.  Macleod  has  given  a  very  clear  picture  of  their 
ideas  and  practices,  which  he  confidently  claims  form  the 
basis  of  the  origin  of  credit.     Another  strong  argument 


THE  THEORY  OP  CREDIl  7 

In  support  of  this  position  is  the  fact  that  the  fundamental  ^ 
bases  of  the  laws  affecting  credit  of  even  this  day  can  be 
traced,  as  he  says,  to  the  legislation  of  Justinian.  These  , 
laws  show  indubitably  that  the  Romans  practiced  credit  7 
in  its  most  modern  utilities,  and  instituted  the  custom  of 
using  credits  as  the  basis  of  providing  themselves  with 
capital  when  needed.  It  is  a  remarkable  thing  that  the 
system  of  credit  originated  by  the  Romans,  and  which  "^ 
differs  in  no  essentials — if  at  all — from  the  purposes 
and  functions  of  credit  which  we  employ  to-day,  should 
have  practically  disappeared  imtil  a  few  centuries  ago, 
barring  the  banking  credit  of  some  of  the  Italian  cities  / 
and  that  of  the  Bank  of  Amsterdam  in  the  Middle  Ages. 
This  may  also  be  looked  upon  as  another  reason  why  the 
theory  or  principles  of  credit  have  not  been  more  thor- 
oughly understood  and  appreciated,  but  it  is  certain  that 
the  theory  of  the  question  must  have  for  its  foundation 
some  known  position,  customs,  and  laws,  for  it  is  claimed 
that  "  concrete  practice  always  precedes  abstract  theory." 
The  elementary  principles  of  credit  may  be  compre- 
hended thus:  that  credit  is  the  natural  sequence  of  man's 
desires  to  avail  himself  of  the  use  of  certain  species  of 
property;  and  for  the  repayment  of  this  property  in  its 
original  or  equivalent  form,  he  utilizes  certain  elements 
of  both  tangible  and  intangible  character  to  induce  the 
owner  to  part  with  his  property  to  him.  The  tangible 
element  is  represented  by  the  property  of  him  who  is 
seeking  credit  and  which  he  pledges  either  by  actual  trans- 
fer or  lien,  or  by  the  good  faith  that  is  reposed  in  him, 
that  he  will  preserve  that  property  either  in  its  original 
or  equivalent  form  so  that  it  will  serve  as  a  practical  basis 
of  his  ability  to  redeem  the  obligation  incurred.     Where 


8  CREDIT  AND  ITS  USES 

the  question  of  good  faith  enters,  there  the  intangible 
takes  a  place  as  one  of  the  elementary  principles  of  credit ; 
also  this  question  of  good  faith  may  be  the  only  basis  upon 
which  credit  is  sought  or  extended,  and  at  times  is,  to  a 
great  extent,  the  only  basis  recognized  in  mercantile  credit. 
Good  faith  covers  character  and  its  elements,  respectabil- 
ity, honesty,  uprightness,  the  manner  in  which  a  man's 
abilities  will  be  exercised,  whether  industriously  or  slug- 
gishly, and  we  shall  later  see  credit  is,  to  a  very  large  ex- 
tent, dependent  upon  these  intangible  elements.  When  we 
consider,  as  Professor  Ely  has  said,  that  "  the  character- 
istic instrument  of  exchange  in  our  day  is  not  money  but 
credit,  and  its  development  measures  the  perfection  of 
modern  exchange,"  we  can  understand  the  pervading  in- 
fluence of  this  branch  of  economics. 

The  author  does  not  desire  to  expound  or  exploit  any 
favorite  ideas  or  theories  simply  for  the  sake  of  pride  of 
originality,  but,  on  the  contrary,  to  express  only  those 
views  which  have  a  justification  in  practice  and  in  the 
principles  and  statements  of  the  authorities,  as  will  be 
shown  by  the  following  accepted  definitions  on  the  ques- 
tion of  credit. 

1.  A  general  view. 

v^  "  Credit  is  the  confidence  that  is  reposed  in  the  ability  and  pur- 

pose of  men  to  meet  future  obligations." 

2.  Mr.  Henry  Thornton :  "  An  Inquiry  into  the  iN'a- 
ture  and  Effects  of  the  Paper  Credit  of  Great  Britain." 

"  Commercial  credit  may  be  defined  to  be  that  confidence  which 
subsists  among  commercial  men  in  respect  to  their  mercantile 
affairs.  This  confidence  operates  in  many  ways:  it  disposes  them 
to  lend  money  to  each  other,  to  bring  themselves  imder  various 


THE  THEORY  OF  CREDIT  9 

pecuniary  engagements  by  the  acceptance  and  indorsement  of 
bills,  and  also  to  sell  and  deliver  goods  in  consideration  of  an  equiva- 
lent promised  to  be  given  at  a  subsequent  period." 

3.  Mr.  Henry  C.  Carey:  "The  Credit  System  in 
France,  Great  Britain,  and  the  United  States." 

"Credit  cannot  exist  without  confidence  in  the  security  of  prop-        </ 
erty  and  in  the  disposition  of  the  purchaser  of  a  commodity  to  pay 
for  it  at  the  time  appointed.     No  man  parts  with  his  property 
except  when  he  believes  that  an  equivalent  will  be  returned." 

4.  Mr.  Walter  Bagehot :  "  Lombard  Street." 

(a)  "Credit — the  disposition  of  one  man  to  trust  another — is      / 
singularly  varying." 

(b)  "Credit  is  an  opinion  generated  by  circumstances  and  vary- 
ing with  those  circumstances.  The  state  of  credit  at  any  par- 
ticular time  is  a  matter  of  fact  only  to  be  ascertained  like  other 
matters  of  fact;  it  can  only  be  known  by  trial  and  inquiry." 

5.  Mr.  Henry  Dunning  Macleod,  M.  A. :  "  The  Theory 
of  Credit." 

"Credit  is  the  present  right  to  a  future  payment  or  credit  is; 
therefore,  the  right  or  property  of  demanding  something  from 
some  one  else.  It  is  the  right  to  a  future  payment;  it  is  the  name 
of  a  certain  species  of  right  or  property.  Gold  and  silver  money 
may  be  called  metallic  credit." 

6.  Mrs.  Millicent  Garrett  Fawcett :  "  Political  Econ- 
omy for  Beginners." 

"Credit  is  a  power  to  borrow.  If  the  credit  of  an  individual 
is  good,  it  is  because  there  is  general  confidence  in  his  ability  to 
pay,  and  therefore  he  can  borrow  at  a  low  rate  of  interest.  If  the 
credit  of  an  indi\'idual  is  bad,  he  is  not  able  to  borrow  except  at  a 
high  rate  of  interest,  because  his  ability  to  pay  is  doubted.  The 
credit  of  different  people  in  the  same  age  and  country  can  be  ac- 
curately measured  by  the  rate  of  interest  which  they  pay  for  borrow 
ing." 


10  CREDIT   AND   ITS   USES 

7.  Prof.  J.  Lawrence  Laugblin :  "  Credit." 

"Credit  is  machinery  invented  to  aid  in  accomplishing  the 
purposes  of  capital ;  if  an  essential  function  of  capital  is  to  discount 
the  future,  the  essential  characteristic  of  credit  is  the  element  in  it 
of  futurity.     The  connection  is  not  far  to  seek." 

"To  get  credit,  therefore,  is  to  obtain  a  transfer  to  oneself 
of  commodities  under  an  obHgation  (variously  expressed,  accord- 
ing to  different  habits  and  circumstances)  to  return  an  equivalent 
amount  at  a  fixed  date  in  the  future." 

8.  Prof.  Richard  T.  Ely :  "  Outlines  of  Economics." 

(a)  "A  word  of  many  meanings." 
J    (6)  "Credit  is  a  transfer  of  goods  for  a  promised  equivalent." 

9.  Mr.  Wilbur  Aldrich :  "  Money  and  Credit." 

"Credit  may  ...  be  defined  to  be  an  economic  quantity 
arising  out  of  a  business  as  a  going  concern,  and  proportional  in 
amount  to  the  reputation  of  the  business,  its  property,  and  the 
rapidity  and  regularity  of  its  cash  turnover.  The  use  of  credit 
does  not  tie  up  or  hamper  the  free  use  of  the  material  capital 
belonging  to  the  concern  using  its  credit.  Only  business  men 
have  credit  in  a  commercial  sense,  and  it  is  not  the  moral  char- 
acter of  a  person  which  gives  him  credit,  but  his  business  reputa- 
tion. A  corporation  may  have  this  business  reputation.  To  have 
credit  a  business  man  or  concern  must  be  known  to  be  regular  in 
paying  debts,  and  the  business  must  be  a  paying  one,  giA'ing 
reasonable  expectation  of  continued  ability  to  meet  obligations 
promptly." 

10.  Prof.  Erederick  A.  Cleveland :  "  Eunds  and  Their 

Uses." 

"These  two  judgments  lie  at  the  basis  of  all  credit;  on  these 
two  elements  does  the  value  of  credit  rest.  (1)  A  judgment  that 
the  one  promising  is  able  to  fulfill  his  promise.  (2)  A  judgment 
that  he  will  be  xoillmg.  Willingness  is  another  name  for  'honesty' 
or  'integrity.'    Confidence  is  nothing  more  or  less  than  the  result 


THE  THEORY  OF  CREDIT  11 

«f  judgment  that  a  person  is  both  able  and  willing  to  do  what  he 
promises." 

11.  Mr.  Frederick  B.  Goddard:  "Giving  and  Getting 

Credit." 

"Commercial  credit  is  the  name  of  that  trust  which  is  reposed 
in  men  because  of  their  character  and  resources.  In  other  words, 
it  is  an  estimate  of  ability  and  disposition  to  fulfill  business  engage- 
ments, which  confers  purchasing  power;  power  to  command  the 
industrj-  or  capital  of  others." 

12.  Prof.  C  J.  Bullock:  "Introduction  to  the  Study 
of  Economics." 

"Credit  may  be  defined  as  the  power  to  secure  commodities  or 
ser\'ices  at  the  present  time  in  return  for  some  equivalent  promised 
at  a  future  time." 

The  foregoing  estimates  of  credit  have  not  been  se- 
lected with  a  view  to  proving  any  one  or  chosen  concept 
of  the  subject;  they  may  be  reasonably  and  reliably  ac- 
cepted as  a  fair  and  average  expression  of  competent 
authorities  on  the  meaning  and  range  of  the  question. 
From  them  we  can  assuredly  draw  accurate  conclusions 
as  to  the  influences  affecting  credit,  as  well  as  a  definite 
judgment  of  its  theory  or  principles.  An  analysis  of  the 
definitions  submitted  reveals  this  result:  that  the  prin- 
ciples involved  in  credit  are : 

A.  That  it  rests  largely  on  confidence,  trust,  faith,  and  good 
opinion, 

B.  That  it  is  not  moral  character  (per  se),  but  business  reputa- 
tion that  establishes  and  maintains  good  credit. 

C.  That  it  is  a  power  inherently  resting  upon  the  qualities 
enumerated  (in  A)  to  borrow  money  or  any  other  class  of  property. 

D.  That  one  of  the  principal  elements  entering  into  credit  is 
that  of  futurity,  or  a  deferred  fulfillment  of  an  obligation. 


12  CREDIT  AND  ITS  USES 

Professor  Laughlin  in  his  treatise  on  "  Credit "  dis- 
counts the  theory  or  general  opinion,  we  might  say,  that 
credit  is  largely  dependent  on  confidence;  and  holds  that 
confidence  only  enters  into  the  case  as  it  relates  to  the  ele- 
ment of  futurity.  It  is  not  my  desire  to  hreak  a  lance 
with  the  gifted  Laughlin,  but  I  do  take  issue  with  the 
attempts  to  make  it  appear  that  the  element  of  confidence 
is  a  subordinate  one ;  and  that,  especially  in  mercantile 
credit,  the  theory  of  "  goods  to  goods  "  has  a  controlling 
place.  A  system  where  credit  is  based  upon  collateral 
properties  may  be  superficially  more  advantageous  than 
one  where  the  element  of  risk  is  predominant,  but  it  is 
with  the  present  world  we  are  dealing;  it  is  with  man 
as  we  know  him  and  as  he  is  that  we  are  doing  business, 
and  that  business  must  be  regulated  as  we  find  him.  The 
part  that  confidence  plays  in  credit  has  always  been  a  sub- 
ject of  controversy,  due  to  the  fact  that  most  writers  on 
the  subject  of  economics  being  unfamiliar  with  mercantile 
life  and  custoins,  fail  to  distinguish  between  the  systems 
of  banking  credit  and  mercantile  credit ;  and  give  most  of 
their  attention  to  the  functions  of  instruments  of  credit. 

No  matter  how  earnest  may  be  the  effort  or  persuasive 
the  argument,  it  is  simply  impossible  to  dismiss  "  con- 
fidence "  as  the  leading  requisite  of  credit.  It  is  notice- 
able that  even  where  staid  economists  treat  the  question 
solely  as  one  of  "  value  based  on  collateral  value,"  we  find 
many  authorities  who  can  be  quoted  to  the  contrary;  for 
example,  Mill  says : 

"As  the  confidence  on  which  credit  is  grounded  extends  itself, 
means  are  developed  by  which  even  the  smallest  portion  of  capital, 
the  sums  which  each  person  keeps  by  him  to  meet  contingencies 
are  made  available  for  productive  uses." 


THE  THEORY  OF  CREDIT  13 

Mr.  Walter  Bagehot  says: 

"Credit  means  that  a  certain  confidence  is  given,  and  a  certaia 
trust  reposed.  Is  that  trust  justified?  and  is  that  confidence  wise? 
These  are  the  cardinal  questions.  To  put  it  more  simply — credit 
is  a  set  of  promises  to  pay;  will  those  promises  be  kept?  Espe- 
cially in  banking,  where  the  'liabilities,'  or  promises  to  pay,  are 
so  large,  and  the  time  at  which  to  pay  them,  if  exacted,  is  so 
short,  an  instant  capacity  to  meet  engagements  is  the  cardinal 
excellence." 

It  will  be  observed  that  Mr.  Mill  speaks  of  the  con- 
fidence on  which  credit  is  grounded.  Could  anything  be 
clearer  than  this  in  setting  forth  confidence  as  "  the 
primary  element  in  credit "  ?  But  further,  and  quite  as 
conclusive,  Mr.  Bagehot  says  in  referring  to  confidence 
and  trust  as  elements  of  credit,  "  These  are  the  cardinal 
questions."  But  probably  the  most  striking  statement  as 
to  the  place  that  confidence  fills  and  should  fill  in  credit 
comes  from  Mr.  Mill,  whom  we  have  just  quoted.  In 
speaking  on  the  benefits  of  credit,  he  says : 

"This  benefit  will  be  reaped  far  more  largely,  whenever, 
through  better  laws  and  better  education,  the  community  shall 
have  made  such  progress  in  integrity  that  personal  diarader  can 
be  accepted  as  a  sufficient  guarantee  not  only  against  dishon- 
estly appropriating,  but  against  dishonestly  risking  what  belongs 
to  another." 

Mr.  Macleod  in  considering  credit  never  relinquishes 
his  theory  as  to  the  legal  environment  of  credit  and  his 
definition  is,  therefore,  of  more  than  ordinary  interest, 
differing  as  it  does  so  radically  in  phraseology  and  con- 
tent from  almost  all  other  definitions,  whether  of  the  Eng- 
lish, French,  or  German  schools.  He  says,  "  Credit  is  a 
present  right  to  a  future  payment,"  and  there  could  be  no 


14  CREDIT  AND  ITS   USES 

better  expression.  A  merchant  sells  a  bill  of  goods;  he 
parts  with  possession  of  the  property,  and  it,  as  well  as 
the  title  to  it,  passes  to  the  person  to  whom  the  sale  has 
been  made.  What  does  the  merchant  hold  as  against  the 
sale  ?  Simply  the  "  right "  to  collect  the  equivalent  of  the 
sale  at  the  appointed  time  of  payment  or  settlement.  He 
cannot  retake  the  goods  forcibly  except  under  certain  con- 
ditions which  are  not  germane  to  this  phase  of  the  discus- 
sion ;  he  cannot  compel  the  customer  to  give  him  back  the 
goods;  all  he  holds  is  the  right  to  expect  and  exact  pay- 
ment when  the  latter  is  due.  He  can  dispose  of  that  right 
(as  Mr.  Macleod  says)  and  raise  funds  upon  it.  If  that 
right  exists  only  in  the  form  of  a  book  account,  he  can  dis- 
pose of  it  just  the  same  as  if  it  were  an  instrument  of 
credit  (a  check,  note,  draft,  etc.)  by  selling  to  another 
or  transferring  to  another  the  "  right "  to  exact  payment 
in  his  place.  The  case  differs  in  no  way  if  the  merchant 
at  the  time  the  sale  is  made  accepts  a  note  for  the  amount 
of  the  invoice — the  note  is  nothing  more  than  the  "  right " 
(expressed  in  words)  to  a  certain  sum  of  money  at  a  cer- 
tain time ;  and  this  note  or  "  right "  can  be  sold,  or  dis- 
counted, or  used  as  borrowing  material.  Mr.  Macleod's 
own  words  on  this  question  are  worthy  of  full  notice,  as 
follows : 

"Every  case  of  a  'Loan'  of  Money  or  a  Sale  of  goods  'on  Credit' 
is  an  exchange ;  or  an  act  of  commerce.  In  exchange  for  the  Money 
or  the  Goods  a  Right  of  action  is  created;  and  is  the  price  of  the 
goods.  This  Right  of  action  is  a  Saleable  Commodity;  which  may 
be  bought  and  sold  like  any  material  chattel:  and  it  has  value 
because  it  will  be  paid  in  money.  This  Right  of  action  may  cir- 
culate in  commerce  exactly  like  a  piece  of  money,  and  effect  ex- 
changes exactly  like  a  piece  of  money,  until  it  is  paid  off  and 
extinguished:  and  then  it  ceases  to  exist." 


THE  THEORY  OF  CREDIT  15 

The  endeavor  has  been  to  provide  an  exposition  of  the 
"  theory  of  credit "  which  would  accord  in  all  essential 
respects  to  the  best  thought  obtainable,  and  especially  such 
a  description  of  the  nature  of  the  study  as  would  be  easily 
applicable  to  the  ordinary  usages  of  trade  and  industry, 
r.nd  therefore  well  within  the  ready  gi'asp  of  business  men, 
to  whom  a  thorough  knowledge  and  dialectic  appreciation 
of  the  principles  of  credit  is  highly  essential. 


CHAPTER   II 


THE    CEEDIT    SYSTEM 


Me.  Stephen  Colwell,  in  his  work  on  "  Ways  and 
Means  of  Payment,"  calls  attention  to  the  difference  be- 
tween "  credit  "  and  the  "  credit  system."  The  principle 
of  credit,  viewed  as  an  abstract  proposition,  must  not  be 
confounded  with  the  great  system  by  means  of  which 
transactions  in  credit  are  conducted,  and  the  tremendous 
volume  of  debts  and  credits  brought  into  being,  passed 
from  hand  to  hand  in  the  routine  of  business,  and  finally 
liquidated. 

Mr.  Macleod  has  given  us  an  almost  classical  interpre- 
tation of  the  credit  system,  which,  he  says  "  comprehends: 
1,  the  creation  of  obligations ;  2,  the  transfer  of  credits  or 
debts;  3,  the  extinction  of  obligations." 

In  these  three  processes  we  see  the  origin,  the  exist- 
ence, and  the  wiping  out  of  a  business  transaction  based 
on  credit.  Much  may  happen  during  the  life  of  a  credit 
to  alter  its  value ;  the  general  character  of  a  credit  or  debt 
depends  very  largely  on  the  nature  of  the  conditions  or 
forces  that  bring  it  into  life;  what  is  commenced  well 
usually  prospers,  and  a  good  account  will  be  rendered 
when  the  end  has  arrived.  It  will  be  apparent  that  the 
character  of  credit  transactions  is  predicated  on  the  tone 
or  morale  of  the  system  itself,  for  all  credit  systems  are 
16 


THE  CREDIT  SYSTEM  17 

not  good,  and  all  have  their  weaknesses  as  well  as  their 
virtues.  "  The  main  point  on  which  one  system  of  credit 
differs  from  another  is  soundness." 

As  the  requirements  of  commerce,  due  to  the  discoveiy 
of  new  lands  and  increase  of  population  (and  the  general 
tendencies  of  modern  civilization)  have  become  more  and 
more  exacting,  the  system  of  credit  has  been  subjected  to 
a  tremendous  development;  but  from  a  scientific  view- 
point this  is  merely  the  natural  evolution  of  economic 
forces,  evident  always  to  the  keen  observer  of  the  condi- 
tions underlying  the  nature  and  expansion  of  commerce. 

Those  who  have  investigated  the  theory  and  system 
of  credit,  whether  from  the  viewpoint  of  scientific  proposi- 
tions or  commercial  customs  of  ancient  or  modern  applica- 
tion, are  unanimous  in  declaring  that  their  fimdamental 
precepts  rest  upon  immutable  decrees  of  use  and  treatment, 
which  man  must  observe  with  unceasing  faithfulness  if  he 
would  obey  the  dictates  of  wisdom  and  prudence.  To  dis- 
regard these  laws  will  inevitably  produce  distrust  and 
disaster. 

A  duty  of  more  than  ordinary  importance  rests  upon 
those  who  regulate  and  control  the  system  of  credit.  The 
terms  "  regulation  "  and  "  control "  are  somewhat  figura- 
tive, for  the  system  of  credit  does  not  physically  submit 
itself  into  the  hands  of  any  few  men  or  interests.  It  is 
probably  one  of  the  weaknesses  of  the  system  that  its  good 
management  must  depend  upon  the  collective  judgments 
and  will  of  a  very  great  number  of  men  and  interests, 
each  acting  for  himself,  almost  always  on  his  own  indi- 
vidual ideas  of  right  and  wrong,  of  accuracy  and  inac- 
curacy, responsible  only  to  himself.  No  wonder  that  there 
should  be  a  demand  for  a  cooperative  rather  than  an  indi- 


18  CREDIT  AND   ITS   USES 

vidual  interest.  Much  has  been  done  toward  the  question 
of  wise  regulation  by  the  watchfulness,  as  well  as  by  the 
ministering  influences  of  the  clearing  houses,  especially  in 
times  of  stress  and  danger ;  but  the  "  regulation "  and 
"  control  "  should  be  constant,  active,  energetic,  and  pow- 
erful ;  and  the  credit  system  will  never  have  reached  that 
state"  of  soundness  which  the  general  judgment  of  men, 
even  to-da}'^,  claims  should  be  attained,  until  those  who 
have  this  great  trust  in  their  hands  take  the  necessary  steps 
to  bring  about  the  results  that  wisdom  and  conservatism 
demand. 

A  system  of  credit  is  in  itself  a  proof  that  the  ideas 
and  customs  of  the  people  have  reached  a  state  of  de- 
velopment associated  with  advanced  civilization.  Among 
backward  races  and  peoples  credit  is  not  used;  more 
primitive  and  simpler  methods  satisfy  the  desires  of  such 
peoples;  Mr.  Henry  C.  Carey  says  ("  The  Credit  System 
in  France,  Great  Britain,  and  the  United  States  ")  :  "  The 
existence  of  a  system  of  general  credit  is  evidence  that  the 
people  comprising  the  community  in  which  it  exists  be- 
lieve that  their  neighbors  are  honest  and  will  pay  the  debts 
they  may  contract."  This  is  another  reminder  of  the 
prominence  and  prevalence  of  confidence  in  the  structure 
of  credit,  and  in  every  branch  of  the  subject  we  find  con- 
fidence ever  present  as  a  determining  factor  in  the  opera- 
tions of  credit. 

The  credit  system  must  naturally  have  had  its  incep- 
tion in  the  earliest  form  in  which  credit  was  practiced, 
this  form  assuming  the  character  of  "  personal  credit." 
Therefore,  "  personal  credit  resting  solely  on  the  good 
faith  of  the  creditor  was  the  earliest  form  in  which  credit 
appeared."     The  needs  and  exactions  of  commerce  devel- 


THE  CREDIT  SYSTEM  19 

oped  this  form  of  credit  until  it  was  in  general  practice, 
and  thus  we  have  the  present  system  of  credit.  The  span- 
ning of  the  many  years  during  which  this  system  became 
the  force  it  is  to-day  was  accompanied  by  many  changes 
in  men's  methods,  manners,  and  customs,  and  the  present 
system  is  the  fruition  of  a  long  travail  of  economic  evolu- 
tion.   Mr.  Bagehot  says: 

"  Credit  is  a  power  which  may  grow,  but  cannot  be  constructed. 
Those  who  live  under  a  great  and  firm  system  of  credit  must  con- 
sider that  if  they  break  up  that  one  they  will  never  see  another, 
for  it  will  take  years  upon  years  to  make  a  successor  to  it." 

It  is  therefore  necessary  to  bring  the  study  forward 
from  the  sphere  of  personal  credit  or  "  credit  in  its  sim- 
plest form,"  "  that  of  money  lent  by  one  person  to  another 
and  paid  directly  into  his  hands,"  to  that  stage  where  it 
occupies  the  most  prominent  place  in  the  movements  of 
commerce.  Credit  holds  this  place  of  prominence  not 
alone  by  virtue  of  its  organic  merit  as  an  economic  force, 
but  also  from  the  fact  that  its  utilities  have  been  exer- 
cised and  adjusted  by  such  means  as  enable  it  to  satisfy 
fully  the  demands  of  commerce,  viz.,  by  the  use  of  instru> 
ments  of  credit. 

We  now  come  to  an  extremely  interesting  and  ramify- 
ing function  of  credit  as  well  as  one  of  its  most  illuminat- 
ing principles,  and  that  is  the  uses  of  "  credit  as  a  substi- 
tute for  money."  These  uses  take  different  forms,  namely : 
bills  of  exchange,  accommodation  bills,  promissory  notes, 
bank  notes,  and  checks.  They  are  all  evidences  of  actual 
indebtedness,  except  in  their  primary  state,  when  given 
for  accommodation,  and  as  such,  when  accepted  in  satis- 
faction of   an   account  or   debt  of   any   kind,   they    are 


20  CREDIT  AND  ITS  USES 

credits  pure  and  simple.  But  they  do  not  represent  credit 
given  only  to  the  person  who  originally  tendered  the  note, 
we  will  say,  in  payment  of  an  account  to  his  creditor; 
but  the  creditor,  in  nearly  all  cases,  secures  credit  for 
himself  upon  this  same  paper  by  either  tendering  it  in 
turn  in  payment  of  an  indebtedness  of  his  own,  or  by 
discounting  it  with  a  bank  or  money  lender,  which  inter- 
ests may  renegotiate  it  for  purposes  of  their  ovm.  A  note 
for  $1,000  may  be  used  six  times  over,  and  in  several 
of  these  instances  employed  in  the  purchase  of  goods, 
thus  proving  the  absolute  soundness  of  the  argument  that 
credit  is  a  creator  of  purchasing  power. 

This  brings  to  the  forefront  another  feature  of  the 
functions  and  effects  of  credit.  Bills  of  exchange,  notes, 
checks,  etc.,  given  from  hand  to  hand,  distributed  from 
one  district  to  another,  become  a  part  of  the  circulating 
medium  of  the  country,  and  to  the  extent  that  these  in- 
struments of  credit  represent  real  and  tangible  property, 
they  contribute  life  and  stability  to  this  branch  of  our 
circulating  medium,  and  in  the  ratio  that  they  represent 
fictitious  undertakings  and  purely  speculative  enterprise, 
they  make  for  unsoundness  fraught  with  dangerous  com- 
plications to  that  medium. 

Mr.  Mill  holds  that  credit  being  only  permission  to 
use  the  capital  of  another,  the  means  of  production  can- 
not be  increased  by  it,  but  only  transferred.  This  state- 
ment has  considerable  bearing  upon  the  workings  of  the 
credit  system,  as  the  functions  of  that  system  have  been 
held  by  many  to  augment  the  purchasing  power  of  a 
nation,  or  to  add  to  the  means  of  production.  Means  of 
production  refer  to  those  methods  through  which  the  pro- 
ductive capacity  of  the  country  can  be  utilized.     If  from 


THE  CREDIT  SYSTEM  21 

any  cause  capital  is  hoarded,  or  general  irapoverisbment 
should  exist  among  a  people,  they  assuredly  have  not  the 
means  and  cannot  secure  the  means  with  which  to  pur- 
chase machinery,  tools,  and  other  necessary  equipment  to 
either  start  or  maintain  manufactures,  or  mining,  or  the 
other  numberless  forms  of  industry  in  which  an  intelli- 
gent people  are  interested ;  and  also  the  absence  of  proper 
equipment  to  till  the  soil  and  harvest  the  crops  reduces 
the  power  and  results  of  production. 

As  the  productive  capacity  of  a  people  measures  its 
material  power  and  prestige,  the  credit  system  should  be 
tested  and  utilized  to  its  full  legitimate  strength  in  order 
to  draw  out  the  best  fruits  of  that  capacity.  The  uses  of 
the  credit  system  put  a  developing  power  into  the  hands 
of  the  people  with  which  they  further  their  productive 
capacity,  and  credit  thus  becomes  a  creator  of  purchasing 
power.  Mr.  Mill  enters  a  qualifying  statement  as  to  the 
purchasing  power  of  credit,  or  its  effects  as  purchasing 
power,  when  he  says: 

"Credit,  in  short,  has  exactly  the  same  purchasing  power  with 
money;  and  as  money  tells  upon  prices  not  simply  in  proportion 
to  its  amount,  but  to  its  amount  multiplied  by  the  number  of 
times  it  changes  hands,  so  also  does  credit;  and  credit  transferable 
from  hand  to  hand  is  in  that  proportion  more  potent  than  credit 
which  only  performs  one  purchase." 

It  is  an  economic  truism  that  the  credit  system  draws 
wealth  into  the  channels  of  trade  and  productivity;  in 
fact,  this  is  the  primal  function  of  credit.  Personal  quali- 
ties are  reckoned  as  wealth,  and  the  credit  system,  in  pro- 
viding means  for  the  activity  and  display  of  these  per- 
sonal qualities,  is  performing  just  as  important  a  duty  as 
when  it  brings  about  the  introduction  of  material  "  pros- 


22  CREDIT  AND  ITS  USES 

perity "  in  the  uses  of  trade.  Economically,  personal 
qualities  are  a  part  of  the  wealth  of  every  people,  although 
many  hold  that  such  qualities  should  not  be  included  and 
that  wealth  refers  to  "  those  objects  that  are  external  to 
man." 

No  enumeration  of  the  advantages  of  credit  sets  forth 
the  great  merits  of  the  system  in  more  forceful  style  than 
that  of  Professor  Conrad  of  Halle,  in  his  lectures  on 
political  economy  which  are  quoted  in  full  by  Professor 
Ely  in  his  article  on  "  German  Cooperative  Credit 
Unions."  It  is  a  graphic  presentation  of  the  origin  and 
utilities  of  those  institutions.  The  statement  which  fol- 
lows comprises  the  quotation  to  which  reference  has  been 
made,  with  the  exception  of  division  No.  9,  which  is  Pro- 
fessor Ely's  own : 

"(1)  Credit  furnishes  a  more  perfect  and  convenient  means 
of  payment  in  large  sums  and  between  distant  places  than  the 
precious  metals,  saving  time  and  labor.  This  is  effected  by  means 
of  notes,  checks,  and  bills  of  exchange.  (2)  Credit  takes  the  place 
of  corresponding  amounts  of  gold  and  silver.  This  is  a  saving,  as 
it  enables  us  to  employ  the  precious  metals  for  other  useful  purposes. 
(3)  Capital  is  employed  more  productively.  He  who  possesses 
capital,  but  is  for  any  reason  unable  to  make  use  of  it,  transfers  it 
to  another  for  a  compensation,  to  the  benefit  of  both,  as  weU  as 
that  of  the  public  economy.  It  is  given,  cceteris  paribits,  to 
him  who  is  ready  to  pay  the  highest  price  for  its  use ;  that  is,  in 
general,  to  him  who  can  employ  it  most  productively.  (4)  The 
laborers,  artisans,  and  traders,  although  unprovided  with  means 
of  their  own,  may  by  the  use  of  credit  obtain  capital  to  assist  them 
in  their  labors,  and  that  without  sacrificing  their  independence. 
This  point  is  to  be  particularly  borne  in  mind  as  of  especial  weight 
in  judging  the  credit  unions.  Credit  is  thus  of  importance  in 
avoiding  that  separation  of  capital  and  labor  which  excites  so  much 
bad  feeUng,  and  which  forebodes  danger  to  modern  civihzation. 


THE  CREDIT  SYSTEM  23 

(5)  Credit  gathers  together  the  smallest  sums,  which,  by  means  of 
joint-stock  companies  and  otherwise,  are  economically  employed. 
Capital  is  concentrated,  but  its  returns  are  disseminated  among 
the  people,  politically  a  weighty  point.  (6)  The  possibility  of  em- 
ploying every  sum,  however  minute,  urges  people  on  to  saving. 
(7)  Credit  binds  together  the  interests  of  those  having  deaUngs 
with  one  another.  Under  a  highly  developed  system  of  credit 
economy,  it  is  the  interest  of  each  to  show  himself  worthy  of  trust ; 
this  can  be  of  advantage  in  the  moral  education  of  a  people.  (8)  It 
enables  men  to  save  for  their  old  age,  and  make  provision  for  their 
families  in  case  of  their  death.  Were  there  no  such  thing  as  credit, 
the  best  one  could  do  would  be  to  heap  up,  and  then  consume  after- 
wards, the  capital  gathered  together.  (9)  Capital,  when  obtained 
under  favorable  circumstances,  yields  a  larger  return  than  the 
interest.  Were  it  otherwise,  borrowing,  except  in  case  of  special 
need  and  distress,  would  cease.  The  prudent  and  skillful  laborer 
who  can  command  credit  is  thus  enabled  to  obtain,  besides  his 
wages,  a  surplus  from  the  use  of  the  capital.  Credit,  well  used,  is 
therefore  economically  as  productive  as  a  favorable  climate  or  a 
high  education  of  a  people." 

A  discussion  of  the  foregoing  will  show  how  these 
advantages  of  credit  affect  our  everyday  life  and  demon- 
strate the  growth  and  usefulness  of  the  credit  system. 

(1)  It  would  be  impossible  to  carry  on  the  business 
of  the  commercial  world  to-day  unless  we  had  such  agen- 
cies as  notes,  checks,  and  bills  of  exchange:  First,  for 
the  reason  that  the  stock  of  precious  metals  would  not  be 
adequate  to  the  discharge  of  the  daily  clearings  of  com- 
merce ;  and  second,  that  it  would  utterly  disorganize  busi- 
ness procedure  if  we  had  to  depend  upon  the  transfer  of 
the  precious  metals  in  order  to  effect  the  extinguishment 
of  obligations.  The  delays,  even  with  our  present  excel- 
lent transportation  facilities,  would  be  the  cause  of  much 
inconvenience,  and  the  very  nature  of  these  commodities 


24  CREDIT  AND  ITS  USES 

would  make  their  use  for  this  purpose  cumbersome  and 
unscientific.  Further,  the  expense  involved  in  moving 
the  precious  metals  for  such  purposes  would  add  a  con- 
siderable percentage  to  the  cost  of  doing  business:  the 
expense  entailed  would  refer  not  only  to  the  cost  of  ship- 
ping, as  far  as  distance  and  bulk  are  concerned,  but, 
more  important  still,  to  the  risk  undergone  in  handling 
them.  Under  our  present  system  of  exchange,  domestic 
and  foreign,  the  largest  transactions  can  be  adjusted  with 
absolute  safety  to  the  interests  of  all  concerned  with  a 
celerity  which  is  marvelous  and  at  an  expense  which  is 
minimized  to  cheapness.  For  instance,  we  see  transactions 
involving  millions  upon  millions  treated  under  our  pres- 
ent system  of  foreign  exchanges — credit — with  as  little 
concern  almost  as  that  with  which  the  ordinary  man  pur- 
chases an  overcoat. 

(2)  Credit,  in  taking  "the  place  of  corresponding 
amounts  of  gold  and  silver,"  performs  another  useful 
function;  for,  as  Professor  Conrad  says,  a  saving  is 
effected  which  permits  the  employment  of  these  precious 
metals  for  other  purposes.  These  other  purposes  are  com- 
prehended in  that  proportion  of  the  precious  metals  used 
in  the  arts,  and  it  is  impossible  to  compute  the  effect 
which  the  introduction  of  these  elements  into  the  arts 
has  upon  the  culture  of  the  people.  Employed  in  this 
form,  they  call  for  a  character  of  workmanship  which 
must  be  of  the  highest  skill  and  proficiency,  and  the  re- 
quirement of  such  skill  and  proficiency  produces  an  appre- 
ciable effect  upon  the  mechanical  genius  of  the  times. 
Further,  the  use  of  the  precious  metals  in  the  arts  affords 
employment  to  a  great  body  of  helpers  and  auxiliaries 
whose  wage-earning  capacity  provides  new  sources  of  con- 


THE  CREDIT  SYSTEM  25 

sumption  for  the  product  of  the  labor  of  other  fields  and 
enterprises. 

(3)  Credit  as  a  means  of  employing  capital  more  pro- 
ductively. This  thought  is  in  harmony  with  the  views  of 
Mr.  Mill  (who  preceded  Professor  Conrad),  set  forth 
with  great  distinctness  in  his  "  Principles  of  Political 
Economy."  It  is  certainly  an  immense  advantage  to  those  |. 
who  have  little  or  no  capital  of  their  own,  to  be  able  to 
call  upon  those  who  are  plentifully  provided,  and  thus 
secure  the  means  with  which  to  embark  in  business.  They 
may  realize  therefrom  a  return  sufficient  to  not  only  pay 
the  interest  on  the  capital  borrowed,  but  also  a  fair  return 
of  interest  on  their  own  investment,  and  a  profit  from  the 
net  results  of  the  business.  Credit,  in  bringing  about  the 
lending  of  money  or  other  form  of  property  or  credit  to 
those  qualified  to  use  it  providently  and  successfully  in 
business  enterprises,  has  conferred  an  inestimable  bless- 
ing upon  mankind.  The  benefits  accrue  not  alone  to  him 
who  borrows,  but  to  him  who  lends,  for,  as  Mr.  Mill  so 
pungently  says,  "  if  it  were  not  for  credit,  many  peoplei 
who  possess  capital  but  have  no  means  of  utilizing  it  them- 
selves, would  find  it  useless  and  profitless,"  so  that  the' 
influence  of  credit  works  doubly  to  benefit  him  who  lends 
as  well  as  him  who  borrows. 

(4)  The  benefits  which  credit  confers  upon  the  laborers 
or  artisans  or  traders  who  through  it  secure  capital  to 
assist  them  in  their  efforts  to  work  out  a  livelihood.  This 
idea,  as  Professor  Conrad  explains,  is  of  particular  appli- 
cation to  the  organizations  known  as  credit  unions  and 
which  are  the  subject  of  the  article  by  Professor  Ely, 
already  referred  to.  A  word  as  to  these  credit  unions 
will  be  useful  in  explaining  the  fourth  advantage  or  bene- 


26  CREDIT  AND  ITS  USES 

fit  of  credit.  The  German  Cooperative  Credit  Unions  are 
the  product  of  a  cooperative  society  founded  by  Herr 
Schulze  (Schulze-Delitzsch)  in  1849,  which  had  for  its 
object  the  purchase  of  raw  material  among  certain  inter- 
ested tradesmen.  From  this  small  beginning  has  grown  a 
really  vast  system  of  cooperative  banks.  Schulze-Delitzsch 
wisely  provided  in  the  very  commencement  of  these  enter- 
prises that  those  who  wished  to  avail  themselves  of  the 
loan  advantages  of  the  institutions  must  become  members, 
and  "  they  thus  themselves  indirectly  furnished  the  se- 
curity for  the  credit  afforded  them."  These  banks  are 
credited  with  great  success,  and  in  1892  were  said  to 
number  1,000,  to  have  a  membership  of  500,000,  and  a 
paid  capital  of  $30,000,000.  They  represent  a  very  close 
analogy  to  our  own  building  and  loan  associations,  and  it 
is  not  necessary  to  explain  what  a  wonderful  good  has  been 
effected  in  this  country  through  the  fact  of  men  being 
able  to  secure  the  credit  with  which  to  provide  their 
families  with  homes. 

(5)  Credit  is  a  force  in  gathering  together  small  sums 
by  which  "  capital  is  concentrated "  and  its  fruits  dis- 
tributed among  the  people.  The  savings  bank  is  the  prin- 
cipal means  by  which  these  small  sums  are  accumulated 
and  utilized  as  capital.  By  the  system  of  savings  banks 
and  other  forms  of  saving  devices,  these  small  and  of 
themselves  unproductive  sums  constitute  a  vast  accumula- 
tion which  is  a  striking  addition  to  the  capital  of  the 
country ;  and  not  only  are  they  such  an  addition,  but  they 
are  in  such  form  that  they  can  be  made  serviceable  to 
promote  the  productivity  of  the  nation. 

(6)  Credit,  by  the  employment  of  "every  sum,  how- 
ever minute,"  inculcates  saving  propensities  among  the 


THE  CREDIT  SYSTEM  27 

people.  This  benefit  must  be  self-evident:  First,  there  is 
the  incentive  offered  of  a  return  on  the  money  saved;  sec- 
ond, there  is  the  encouragement,  which  a  little  earning 
will  furnish,  to  strive  for  even  better  results ;  third,  habits 
of  thrift  are  developed  in  the  people ;  fourth,  independence 
of  thought  and  action  inevitably  follow  on  thrift  and 
economy. 

(7)  "  Credit  binds  together  the  interests  of  those  who 
have  dealings  with  one  another."  Here  we  have  expressed 
in  another  form  a  thought  of  Mr.  Carey:  that  the  exist- 
ence of  a  system  of  credit  is  evidence  that  the  people 
living  under  that  system  have  faith  in  the  good  inten- 
tions of  each  other ;  a  system  of  credit  brings  forcibly  be- 
fore men's  minds  the  fact  that  it  is  an  honor  to  be  of  good 
repute,  and  he  who  is  of  good  repute  in  a  business  sense 
is  he  who  is  in  good  credit.  To  bring  men  together  in 
hearty  cooperation  to  accomplish  the  ends  of  business  life 
and  to  make  the  possession  and  practice  of  sterling  ethics 
a  prerequisite  to  membership  in  the  profession  of  busi- 
ness is  a  great  moral  uplift,  or,  as  Professor  Conrad  ex- 
presses it,  a  "  great  advantage  in  the  moral  education  of 
a  people." 

(8)  Credit,  as  a  means  of  making,  through  prudent  sav- 
ing, provision  for  one's  family  after  death,  illustrates  the 
possibilities  that  present  themselves  for  safely  investing 
capital  so  that  the  income  earned  will  represent  a  deposit 
from  which  running  expenses  may  be  drawn  and  the  sur- 
plus of  such  income  utilized  in  the  form  of  additions  to 
capital  already  acquired. 

(9)  Professor  Ely  has  given  us  an  insight  into  an- 
other phase  of  credit,  viz.,  that  it  is  the  desire  and  expec- 
tation of  those  who  seek  and  obtain  capital  to  make  it 


28  CREDIT  AND  ITS  USES 

produce  a  larger  return  than  the  mere  interest  to  be 
earned,  and  this  increment  is  really  what  in  economics 
would  be  denominated  profit.  It  is  this  expectation  that 
leads  men  to  embark  in  business,  and  to  make  investments 
even  though  the  risks  involved  may  be  many  and  serious ; 
and  it  must  be  borne  in  mind  that  this  spirit  of  adven- 
ture in  trade  has  had  a  very  considerable  effect  upon  the 
progress  of  commerce,  and  in  the  absence  of  that  spirit 
many  of  the  powers  that  commerce  and  credit  have  mani- 
fested would  be  latent. 

While  credit  and  the  credit  system  have  their  benefits 
and  advantages,  they  have  their  weaknesses  and  their 
evils.  It  is  therefore  essential  to  draw  attention  to  the 
abuses  which  may  generate  in  a  system  of  credit,  and  from 
which  there  does  not  appear  to  be  any  kno\vn  means  of 
escape,  if  we  are  to  accept  the  views  of  the  great  doctors 
of  economics  w^ho  have  diagnosed  the  subject  in  every 
phase.  These  abuses  are  those  which  inevitably  lead  to 
commercial  crises,  and  which  all  authorities  agi-ee  would 
be  obviated  if  men  would  simply  regard  the  unwritten 
laws  of  prudence  and  good  management;  but  as  human 
skill,  energy,  knowledge,  and  capacity  are  included  in  the 
category  of  wealth,  it  is  the  veritable  inability  of  laws  of 
any  character  to  control  the  exercise  of  these  personal 
elements  which  renders  the  abuses  of  credit  an  almost  un- 
avoidable occurrence.  The  consensus  of  opinion  is  that 
the  evils  of  credit  may  be  said  to  principally  manifest 
themselves  in  "  speculation  "  and  overtrading,  which  not 
infrequently  lead  to  fraud,  extravagance,  and  embezzle- 
ment. Some  writers  also  claim  that  credit  may  be  used 
to  create  a  monopoly,  and  we  do  not  have  to  go  far  in  this 
day  to  see  the  truth  of  this  claim. 


THE  CREDIT  SYSTEM  29 

The  inevitable  consequence  of  speculation  and  over- 
trading is  failure  to  liquidate,  and  a  general  failure  to 
liquidate  means  a  panic.  We  are  using  here  the  homely 
word  panic  because  it  is  the  one  most  in  use  and  also 
very  descriptive  of  what  really  develops  from  the  condition 
mentioned.  It  is  patent  that  the  credit  system  serves  to 
encourage  speculation,  for  under  the  workings  of  that 
system  a  man  may  pursue  his  way  in  business  long  after 
he  is  unable  to  pay  in  full ;  and,  fighting  off  the  evil  day, 
he  is  engaged  in  a  constant  speculation  with  fate.  Mr. 
Macleod  has  given  us  a  description  of  this  state  of  affairs 
which  is  exceedingly  true  to  nature,  as  follows : 

"All  commercial  crises  therefore  originate  in  the  overcreation 
of  credit,  and  this  is  innate  in  the  modern  system  of  credit.  Sup- 
pose that  at  any  time  the  commercial  world  started  with  a  perfectly 
clean  slate.  "When  such  multitudes  of  persons  are  trading  on 
credit,  it  must  inevitably  happen  that  a  considerable  number  will 
speculate  unsuccessfully,  and  create  an  excess  of  credit,  which  can- 
not be  redeemed  by  fair  means.  All  excess  of  credit  may  be  con- 
sidered as  so  much  virus  or  poison  in  the  body  commercial.  How- 
ever, by  various  tricks  and  devices  known  to  traders,  they  can  keep 
themselves  afloat  many  years  after  they  are  utterly  insolvent ;  and 
thus  the  poison  continually  accumulates.  Then  perhaps  a  fever 
of  speculation  takes  place,  giving  rise  to  the  creation  of  vast  masses 
of  speculative  paper,  and  then,  the  poison  having  accumulated  to  a 
sufficient  extent,  bursts  forth  in  a  tumor  or  an  abscess,  called  a 
commercial  crisis." 

To  the  credit  system  must  also  be  attributed  much  of 
the  extravagance  that  takes  place  in  all  spheres  of  life. 
Men  who  are  known  to  be  living  beyond  what  is  called 
their  "  means/'  or  their  earning  capacity  and  income,  are 
permitted  to  take  advantage  of  the  credit  market  and  con- 
tinue in  their  extravagances.     This  condition  is  respon- 


30  CREDIT  AND  ITS  USES 

sible  for  a  great  deal  of  the  fraud  and  embezzlement  that 
takes  place,  and  much  human  suffering  would  be  avoided 
if  there  were  greater  discretion  shown  in  holding  men  fast 
to  their  "  credit  limits,"  by  which  is  meant  the  establish- 
ing of  a  standard  of  credit-giving  so  high  that  only  those 
who  could  reach  that  standard  would  be  accorded  the  bene- 
fits of  credit. 

As  to  credit  leading  to  monopoly,  it  is  of  course 
assumed  that  when  this  idea  is  advanced  as  showing  an 
evil  in  credit,  its  corollary  is  that  monopoly  itself  must 
be  evil.  This  is,  however,  a  suggestion  outside  the  pur- 
view of  this  discussion.  There  are  numberless  instances 
where  credit  and  the  credit  system  have  been  utilized  to 
create  a  monopolistic  power.  Whether  these  particular 
instances  will  develop  for  good  or  for  evil  remains  to  be 
seen.  As  an  example,  a  man  who  is  undoubtedly  gifted 
with  marked  financial  prescience,  in  a  few  years  secured 
control  of  a  great  railway  system  almost  entirely  through 
trading  on  his  credit.  Our  credit  system  not  only  permits 
such  a  circumstance,  but  the  methods  w^hich  have  crept 
into  the  credit  system  encourage  it.  So  long  as  the  col- 
lateral offered  is  adequate,  the  system  will  survive;  but 
when  men  acquire  the  power  to  influence  loans  of  many 
millions,  there  is  always  the  danger  of  their  power  assum- 
ing an  arrogance  and  carrying  with  it  demands  that  are 
not  strictly  safe  or  legitimate.  It  is  against  this  possible 
danger  that  the  credit  system  should  guard. 

Mr.  Mill  tells  us  that  "  credit  given  by  dealers  to  un- 
productive consumers  is  never  an  addition  but  always  a 
detriment  to  the  sources  of  public  wealth."  An  unproduc- 
tive consumer  passes  the  effects  of  the  credit  he  receives 
to  the  powers  of  destruction. 


THE  CREDIT  SYSTEM  31 

There  are  some  who  assert  that  the  world  would  be 
better  without  credit,  and  that  the  endless  prodigality  and 
speculation  which  it  promotes  would  be  avoided  if  all 
trade  were  upon  a  cash  basis,  or  if,  to  go  farther,  we  should 
reach  that  Utopian  stage  where  the  wants  and  the  oppor- 
tunities of  men  would  be  so  regulated  that  the  existence  of 
money  could  be  dismissed  with  commercial  safety  and 
with  profit  to  the  happiness  and  integrity  of  the  individ- 
ual. But  it  is  not  with  idealisms  we  have  to  treat,  but 
rather  the  credit  system  as  we  find  it,  a  system  which 
typifies  an  "  inexorable  law  of  political  economy  which 
cannot  be  resisted." 


PART  TWO 
PRIMARY  DIVISIONS  OF  CREDIT 


CHAPTER   III 


BANKING    CREDIT 


It  is  not  the  purpose  of  this  work  to  proceed  with 
any  extended  dissertation  on  the  subject  of  banking  credit 
or  banking.  It  is  essential,  however,  that  sufficient  atten- 
tion should  be  accorded  to  this  "  highest  form  of  credit " 
in  order  to  show  its  preeminent  relation  to  and  influence 
upon  the  commercial  structure.  Without  banking  credit 
the  endurance  of  the  commercial  structure  would  not  only 
be  an  unpromising  but  a  negligible  quantity.  While  it  is 
true  that  commerce  obtained  and  exerted  a  strong  influ- 
ence upon  the  development  of  civilization  prior  to  the  in- 
stitution of  what  we  now  recognize  as  banking,  it  is  only 
since  banking  became  the  leverage  of  commercial  exten- 
sion and  activity  in  a  modern  sense  that  commerce  has 
become  the  irresistible  stream  of  progress. 

Banks  are  the  custodians  and  dispensers  of  credit  in 
its  universal  sense.  The  exercise  of  this  credit  is  not  a 
personal,  selfish  possession,  but  a  commercial  trust.  The 
business  of  the  world  cannot  be  accomplished  without  the 
dispensation  of  this  credit,  l^atural  as  well  as  artificial 
influences  and  conditions  justify  this  statement.  Those 
entitled  to  credit  should  receive  it  without  relation  to  per- 
sonal or  ulterior  considerations,  for  unless  this  freedom 

35 


36  CREDIT  AND  ITS  USES 

of  credit  is  exercised  the  uses  of  credit  are  diverted  from 
their  proper  channels. 

It  is  not  intimated  that  a  bank  is  supposed  to  provide 
its  customers  with  permanent  capital.  Such  a  presump- 
tion is  at  variance  with  sound  banking  and  financial 
safety.  Such  a  practice,  if  resorted  to  and  continued,  will 
reveal  those  false  systems  of  credit  which  have  produced 
such  calamities  in  the  world,  and  against  the  resort  to 
which  we  have  been  so  solemnly  warned  by  the  economists. 
It  will  not  require  much  argument  to  show  the  inutility 
of  a  bank  keeping  its  customers  furnished  with  "  per- 
manent capital,"  for  the  thought  is  opposed  to  the  very 
spirit  of  banking.  Good  banking  credit  is  based  on  loans 
made  with  due  regard  to  correct  judgments ;  on  collaterals 
that  are  subject  to  prompt  and  full  liquidation;  or  loans 
consisting  of  paper,  made  and  indorsed  by  persons  of 
sufficient  flexible  means  to  enable  them  to  honor  their  obli- 
gations without  delays.  To  have  large  sums  of  money  lent 
under  conditions  that  the  bank  cannot  avail  itself  of  the 
proceeds  of  the  loan  with  promptitude  is  an  evidence  of 
all  that  is  reprehensible  in  banking.  The  bank  must  be  in 
a  position  to  cancel  its  ovm  obligations  just  as  a  merchant 
must  dispose  of  his,  with  this  very  marked  difference  to 
the  disadvantage  of  the  banker,  viz. :  a  merchant  may  have 
a  large  amount  of  indebtedness  falling  due  on  a  certain 
day ;  he  may  be  accommodated  by  his  bank  with  a  credit 
sufficient  to  satisfy  the  demands  upon  him.  If  he  be  owing 
his  banker,  he  may  be  able  to  secure  an  extension  on  the 
loan ;  if  he  be  merely  owing  book  accounts,  he  may  be  able 
to  put  off  his  creditors  with  what  is  a  reasonable  excuse 
for  his  nonpayment;  but  a  bank,  when  it  is  called  upon 
to  discharge  its  obligations,  must  pay.     Failure  to  do  so 


BANKING  CREDIT  37 

means  its  downfall ;  explanations,  excuses,  promises — none 
of  these  are  sufficient. 

Banks  are  said  to  be  institutions  "  for  lending,  borrow- 
ing, issuing,  or  caring  for  money."  While  the  caring  for 
money  may  be  the  first  interpretation  of  a  bank's  duty  that 
would  occur  to  the  lay  mind,  still  the  "  caring  for  money  " 
must  not  be  accepted  too  literally,  for  the  stock  or  supply 
of  money  compared  with  the  demands  and  clearings  of 
the  market  appears  to  be  a  secondary  consideration.  As 
Professor  Ely  says,  "  Money  ...  is  entirely  inadequate 
to  explain  the  magnitude  of  present  commercial  transac- 
tions," for  while  in  prosperous  or  noraial  times  the  dis- 
parity between  the  money  supply  and  the  gross  volimie 
of  business  creates  no  alarm  and  in  fact  attracts  little 
attention,  still  our  recollections  are  yet  keen  with  the 
thoughts  of  the  calamitous  effects  of  the  abridgment  of 
the  gold  supply  a  comparatively  few  years  ago.  This 
condition,  therefore,  of  relatively  small  money  supply  to 
great  mass  of  business  transactions  is  a  species  of  phe- 
nomena with  which  scientists  and  economists  have  strug- 
gled for  years,  and  so  far  with  few  satisfactory  revealed 
results. 

The  very  nature  of  banking  business,  which  is  almost 
entirely  credit,  puts  into  the  hands  of  the  banking  com- 
munity a  power  which  it  is  difficult  to  estimate,  and  quite 
as  difficult  to  cope  with.  How  far-reaching  this  power  has 
become  may  be  realized  when  it  is  apparent  that  the  ability 
of  nations  to  undertake  any  very  great  enterprises  or  carry 
on  costly  wars  is  dependent  almost  absolutely  upon  the 
dispositions  of  the  banks  of  the  world.  They  can  prevent 
war  or  they  can  enforce  peace.  Their  dictum  may  mean 
either  realization  or  disappointment  for  a  people.     Their 


38  CREDIT  AND  ITS  USES 

tremendous,  overwhelming  power  does  not  rest  upon  ilie 
fact  that  thej  are  simply  "  care  takers  of  money,"  but 
upon  the  greater  fact  that  they  are  the  manufacturers  of 
credit,  and  the  world  submits  to  their  drastic  economic 
power  with  the  docility  of  a  child  to  a  stern,  unbending 
master. 

•  Banks  are  divided  into  three  distinct  classes,  viz. : 
Banks  of  issue  or  circulation,  banks  of  deposit,  and  banks 
of  discount.  There  are  certain  features  of  these  classi- 
fications distinguishable  in  the  very  early  history  of  bank- 
ing, and  it  is  undoubtedly  from  ancient  practices  that 
banks  of  discount  and  deposit  have  had  their  rise.  The 
issuance  and  circulation  of  notes,  especially  a  bank's  own 
notes,  having  nothing  behind  them  but  the  capital  and 
character  of  those  constituting  the  bank,  is  a  development 
of  the  credit  system.  The  method  by  which  a  bank  of 
issue  operates  will  be  shown  later.  It  is  not  material  to 
this  statement  of  banking  credit  to  give  a  description  of 
the  historical  beginnings  and  developments  of  banking: 
the  latter,  as  we  understand  it,  is  the  result  of  a  series 
of  experiments  and  vicissitudes  running  through  the  past 
four  hundred  years. 

It  has  always  been  a  favorite  practice  of  a  certain 
brand  of  politicians  to  decry  the  influence  of  banks  in 
public  affairs,  and  endeavor  in  every  possible  way  to 
prejudice  the  popular  mind  against  these  institutions. 
People  are  likely  at  some  time  or  other  to  become  restive 
under  the  domination  of  an  institution  or  set  of  men  who 
are  really  beyond  their  control,  as  banks  and  bankers  ac- 
tually are.  Nor  are  we  losing  sight  of  the  fact  that  our 
national  banking  system,  as  well  as  that  of  England  and 
other  nations,  is  subject  to  legislative  surveillance  and 


BANKING  CREDIT  39 

action,  which,  however,  are  usually  spent  when  the  laws 
concerning  the  creation  and  system  of  the  banks  are 
adopted.  l!^o  legislature  can  expect  to  control  the  progress 
of  these  institutions  and  the  power  that  by  natural  proc- 
esses becomes  theirs.  This  power  has  been,  and  probably 
always  will  be  a  target  for  loose- jointed  reasoning  and 
political  agitation.  As  Hallam  has  pointed  out,  where 
the  advice  and  wishes  of  the  directors  or  protectors  of 
the  Bank  of  Genoa  were  interposed  in  public  affairs,  it 
was  invariably  in  the  direction  of  that  which  was  health- 
ful to  the  public  weal.  The  same  thing  can  be  said  in 
these  days  in  respect  to  the  advice  and  services  of  the 
banking  community  in  public  matters,  especially  in  regard 
to  the  upbuilding  and  preservation  of  a  sound  public 
credit.  Credit  is  a  most  delicate,  sensitive  quantity,  and 
the  banking  business  being  credit  in  its  highest  sense,  it 
must  not  only  be  treated  with  all  the  circumspection  its 
very  nature  calls  for,  but  it  must  also  be  protected  from 
the  attacks  of  those  who,  although  animated  by  entirely 
sincere  views,  would  do  irreparable  injury  to  the  credit 
system  in  their  desire  to  advance  their  political  principles 
or  ambitions.  It  is  quite  important  that  the  public  should 
be  thoroughly  educated  as  to  the  vast  benefits  that  accrue 
to  commerce  and  civilization  from  that  species  of  credit 
dispensed  by  banks.  Banks  act  as  the  depositories  of  the 
funds  of  the  people,  and  exercise  safe  keeping  over  those 
funds.  This  safe  keeping  also  involves  the  manipulation 
of  these  funds  in  the  form  of  good  loans  or  discounts  at 
rates  of  interest  which  will  yield  a  profit  for  the  deposi- 
tors. But  further  still,  it  means  the  employment  of  these 
funds  in  the  channels  of  trade  in  such  a  manner  as  to 
bring  forth  the  greatest  results,  and  in  this  way  to  en- 


40  CREDIT   AND  ITS  USES 

hance  the  commercial  credit,  the  wealth,  and  the  enter- 
prise of  the  community.  Our  attention  has  been  drawn  to 
the  fact  that  the  activities  of  banks  have  served  to  create 
a  remarkable  expansion  in  the  field  of  credit  which  no 
other  known  influence  has  ever  produced,  or  seemed  likely 
to  produce,  and  this  also  should  be  remembered  when  the 
potency  of  banking  is  under  discussion.  This  expansion 
in  credit  has  also  been  attended  with  considerable  alarm 
on  the  part  of  some  thinkers  who  cannot  bring  themselves 
to  believe  that  it  is  the  product  of  an  entirely  healthy 
growth ;  and  on  the  other  hand,  they  marvel  at  the  possi- 
bility of  a  proper  redemption  of  this  vast  ocean  of  credit. 
Mr.  Macleod  says: 

"Credit  always  has  to  be  redeemed  and  if  this  can  be  done; 
the  Credit  has  been  sound.  Hence  Credit  is  never  excessive,  what- 
ever its  absolute  amount  may  be,  as  long  as  it  always  returns  into 
itself." 

The  fact  that  no  contingency  is  probable  under  which 
all  this  credit  would  have  to  be  redeemed  at  one  time  is,  of 
course,  one  of  the  great  measures  of  safety  to  the  credit 
system.  The  methods  of  that  system  preclude  such  a  pos- 
sibility, and  the  history  of  banking  experience  and  prac- 
tice has  enabled  us  to  understand  this  point  with  absolute 
clearness.     Adam  Smith  explains  this  phenomenon  thus: 

"  A  particular  banker  lends  among  his  customers  his  own  prom- 
issory notes,  to  the  extent,  we  shall  suppose,  of  £100,000.  As 
those  notes  serve  all  the  purposes  of  money,  his  debtors  pay  him 
the  same  interest  as  if  he  had  lent  them  so  much  money.  This 
interest  is  the  source  of  his  gain.  Though  some  of  those  notes  are 
continually  coming  back  upon  him  for  payment,  part  of  them 
continue  to  circulate  for  months  and  years  together.  Though  he 
has  generally  in  circulation,  therefore,  notes  to  the  extent  of 
£100,000,  £20,000  in  gold  and  silver  may,  frequently,  be  a  sufficient 


BANKING  CREDIT  41 

provision  for  answering  occasional  demands.  By  this  operation, 
therefore,  £20,000  in  gold  and  silver  perform  all  the  functions  which 
£100,000  could  otherwise  have  performed." 

It  will  be  seen  that  while,  as  Mr.  Smith  says,  twenty 
per  cent  of  gold  and  silver  are  sufficient  to  sustain  the 
amount  of  credit  referred  to,  still  a  certain  quantity  or 
percentage  of  gold  and  silver  is  necessary  to  carry  on  gen- 
eral business,  and  the  constant  and  easy  circulation  of 
coin  wherever  required  serves  to  promote  and  support 
public  credit  and  confidence.    Montesquieu  says  that: 

"Money  is  a  sign  that  represents  the  value  of  all  merchandise: 
Paper  is  the  sign  of  the  value  of  specie." 

Paper  is  not  only  the  sign  of  the  value  of  specie,  but 
when  readily  accepted  it  is  a  sign  of  the  confidence  of 
the  public  in  the  accessibility  of  a  sufficient  quantity  of 
specie  to  satisfy  business  demands.  The  instant,  almost, 
that  the  public  comes  to  believe  that  the  quantity  of  specie 
available  is  inadequate,  then  paper  loses  its  mystic  power, 
because  the  influence  that  upholds  it  has  withdrawn  its 
favoring  protection. 

On  reading  the  weekly  bank  statements,  the  first 
thought  that  would  probably  occur  to  the  uninitiated 
would  be.  How  can  that  vast  amount  of  credit  be  sus- 
tained by  such  a  relatively  small  amount  of  reserve  ?  The 
danger  is  an  imaginary,  not  a  real  one,  if  the  reserves 
be  sufficient  to  respond  to  the  demands  which  are  likely  to 
be  made  in  the  usual  course  of  business,  which,  Mr.  Bage- 
hot  contends,  must  be  determined  by  the  nature  of  the 
bank's  liabilities. 

The  question  with  which  this  discussion  most  concerns 
itself  is  the  relation  of  banking  credit  to  commerce,  which 


42  CREDIT  AND  ITS  USES 

practically  covers  the  whole  field  of  banking.  The  rela- 
tionship of  commerce  to  banking  is  evidenced  by  what  are 
known  as  instruments  of  credit,  or  documents  or  advices 
of  different  forms  and  uses  which  can  be  made  to  serve 
as  mediums  of  exchange  in  the  very  same  sense  that 
money  is  employed.  The  economic  necessities  which  have 
created  these  instruments  of  credit  are  nothing  more  than 
the  ordinary  requirements  and  practices  which  are  part 
of  our  daily  business  life.  A  merchant  having  purchased 
a  bill  of  goods  on  a  specified  term  of  credit,  gives  to  the 
seller  a  bill  of  exchange,  drawn  on  himself,  representing 
the  amount  of  the  invoice.  The  seller,  needing  money  for 
his  own  business,  passes  this  bill  of  exchange,  with  his 
indorsement  thereon,  to  another  from  whom  he  has  made 
a  purchase,  or  to  whom  he  may  be  in  debt  for  any  other 
reason.  The  third  person  to  whom  the  bill  of  exchange 
is  given  passes  it  on  again  in  liquidation  of  an  indebted- 
ness of  his  own,  and  so  on.  In  this  way  that  bill  of  ex- 
change may  serve  in  the  effacement  of  many  different 
accounts,  and  return  to  the  drawer  literally  covered  with 
indorsements.  What  is  true  as  to  the  function  of  a 
medium  of  exchange,  which  the  particular  bill  referred 
to  has  discharged,  may  be  equally  true  of  many  other 
forms  of  credit  instruments  which  may  be  called  to  mind. 
Promissory  notes,  drafts,  checks,  bills  of  lading,  and  ware- 
house receipts  are  all  credit  instruments  which  can  be 
used  as  mediums  of  exchange  or  substitutes  for  money. 
It  is  in  these  several  forms  that  loans  made  by  banks  are 
evidenced,  and  it  is  mainly  upon  the  convertibility  of 
these  instruments  of  credit  that  a  bank  must  depend  to 
maintain  its  own  credit  in  the  discharge  of  its  obligations 
to  its  depositors.    In  banking  credit,  therefore,  everything 


BANKING  CREDIT  43 

may  be  said  to  rely  upon  the  character  of  the  acceptances 
or  collaterals  which  the  bank  receives  in  consideration  of 
its  loans,  and  it  is  proper,  under  the  circumstances,  to  in- 
quire, if  only  briefly,  into  the  general  nature  of  the  credit 
instruments  which  are  regarded  as  the  more  highly  desira- 
ble and  therefore  safest.     A  leading  writer  says: 

"  Notes,  bills,  drafts,  checks,  book  credits,  or  any  form  of  obliga- 
tion resulting  from  a  credit  transaction,  come  into  existence,  not 
antecedent  to,  but  as  a  consequence  of,  a  transfer  of  goods  involving 
futurity.  Paper  is  purely  fictitious  and  illegitimate  which  is  not 
the  outcome  of  an  operation  in  goods;  and  we  are  enabled  to  test 
whether  loans  are  legitimate,  or  not,  according  as  we  know  whether 
the  discounts  are  gi-anted,  or  not,  for  actual  transfers  of  salable 
goods.  This  test  gives  us  the  means  of  drawing  the  line  between 
sound  and  unsound  banking." 

This  statement  draws  the  line  of  demarcation  with  a 
distinctness  that  leaves  one  in  no  doubt  as  to  the  view 
of  the  writer.  However,  to  stamp  paper  with  the  title  of 
illegitimacy  stains  its  character.  As  a  large  quantity  of 
the  paper  handled  by  banks  does  not  consist  of  credit 
instruments  that  have  their  being  as  the  direct  result  of 
"  actual  transfers  of  salable  goods,"  it  is  pertinent  to  in- 
quire whether  paper  not  blessed  with  such  origin  is  an 
evidence  of  unsound  banking. 

"  A  "  is  a  retired  merchant  of  means :  his  son  desires 
to  make  a  trip  to  a  foreign  country  for  the  purpose  of  look- 
ing over  some  business  propositions.  He  has  not  the 
funds,  so  he  asks  his  father  to  give  him  his  (the  father's) 
note  for  $1,500,  which  he  can  discount  at  a  bank  and 
avail  himself  of  the  proceeds.  "  A  "  complies  with  the 
request,  the  note  is  given  and  used;  the  responsibility  of 
"  A  "  is  unquestioned,  and  it  is  this  responsibility  which 


44  CREDIT  AND  ITS  USES 

the  bank  takes  into  account  when  it  discounts  the  note. 
This  transaction  is  not  the  result  of  an  actual  transfer  in 
goods.     Is  it  fictitious  and  illegitimate  paper? 
Another  writer  takes  this  view: 

"When  one  wishes  to  borrow  money  upon  his  general  credit, 
he  makes  his  promissory  note,  which  is  in  no  way  based  upon  par- 
ticular property.  But  we  may  remark  that  notes  are  not  negotiated 
in  the  market  upon  the  goodness  of  a  man's  character  or  upon 
confidence  in  his  honesty;  but  that  they  depend  upon  the  maker's 
reputation  for  wealth  and  for  regular  payment  of  his  debts,  or,  in 
other  words,  upon  his  commercial  rating. 

"In  the  commercial  world,  and  with  banks  which  discoimt 
notes,  it  is  a  part  of  the  business  to  see  that  an  ample  amount  of 
property  is  behind  every  note  taken.  An  indorser  is  always  re- 
quired, and  if  the  maker  is  at  all  unknown  or  suspected  of  financial 
unsoundness,  another  good  indorser,  or  even  more  than  one,  must 
be  procured ;  so  that,  to  the  lay  mind,  several  times  the  amount  of 
property  promised  by  the  note  is  readily  available  for  its  payment. 
One  not  accustomed  to  business  is  astounded  at  the  requirements 
of  a  bank  before  it  will  discount  a  note  seemingly  perfectly  secure. 
This  is  to  make  up  for  the  remoteness  and  indefiniteness  of  the 
connection  between  the  note  and  the  property  which  may  by  law 
be  ultimately  devoted  to  its  payment." 

The  opinions  expressed  in  the  last  quotation  represent 
the  conditions  under  which  many  loans  are  negotiated. 
There  has  always  been  considerable  discussion  as  to  what 
constitutes  absolutely  real  paper  or  fictitious  paper.  The 
gist  of  Mr.  Thornton's  estimate  of  the  question  is  as 
follows : 

"Real  notes  (it  is  sometimes  said)  represent  actual  property. 
There  are  actual  goods  in  existence  which  are  the  counterpart  to 
every  real  note.  Notes  which  are  not  drawn  in  consequence  of  a 
sale  of  goods  are  a  species  of  false  wealth  by  which  a  nation  is 
deceived.  These  supply  only  an  imaginary  capital,  the  others 
indicate  one  that  is  real. 


BANKING  CREDIT  45 

"In  answer  to  this  statement  it  may  be  observed,  first,  that  the 
notes  given  in  consequence  of  a  real  sale  of  goods  cannot  be  consid- 
ered as  on  that  account  certainly  representing  any  actual  property. 
Suppose  that  A  sells  £100  worth  of  goods  to  B  at  six  months'  credit, 
and  takes  a  bill  at  six  months  for  it;  and  that  B,  within  a  month 
after,  sells  the  same  goods,  at  a  like  credit,  to  C,  taking  a  Hke  bill ; 
and  again,  that  C,  after  another  month,  sells  them  to  D,  taking  a 
like  bill,  and  so  on.  There  may  then  at  the  end  of  six  months 
be  six  bills,  of  £100  each,  existing  at  the  same  time;  and  everyone 
of  these  may  possibly  have  been  discounted.  Of  all  these  bills, 
then,  only  one  represents  any  actual  property. 

"In  order  to  justify  the  supposition  that  a  real  bill  (as  it  is 
called)  represents  actual  property,  there  ought  to  be  some  power 
in  the  billholder  to  prevent  the  property  which  the  bill  represents 
from  being  turned  to  other  purposes  than  that  of  paying  the  bill 
in  question.  No  such  power  exists;  neither  the  man  who  holds 
the  real  bill  nor  the  man  who  discounts  it,  has  any  property  in  the 
specific  goods  for  which  it  was  given :  he  as  much  trusts  to  the  general 
ability  to  pay  of  the  giver  of  the  bill,  as  the  holder  of  any  fictitious 
bill  does.  The  fictitious  bill  may,  in  many  cases,  be  a  bill  given 
by  a  person  having  a  large  and  known  capital,  a  part  of  which  the 
fictitious  bill  may  be  said  in  that  case  to  represent.  The  supposition 
that  real  bills  represent  property,  and  that  fictitious  bills  do  not, 
seems,  therefore,  to  be  one  by  which  more  than  justice  is  done  to  one 
of  these  species  of  bills,  and  something  less  than  justice  to  the  other." 

It  would  appear  that  it  is  very  largely  upon  the  char- 
acter, position,  and  wealth  of  its  maker  and  indorsers 
that  the  acceptability  of  a  note  is  determined.  A  note 
which  owes  its  origin  to  "  an  actual  transfer  of  salable 
goods  "  does  not  seem  to  derive  any  strength  or  merit 
from  that  particular  fact,  unless,  as  Mr.  Thornton  says, 
these  goods  are  pledged  as  collateral  for  the  payment  of 
the  note  in  the  event  of  the  default  of  the  maker;  and 
further,  much  might  also  depend  upon  the  nature  of  the 
goods,  their  constancy  in  demand,  their  nonliability  to 


46  CREDIT  AND  ITS  USES 

depreciation  or  perishability.  It  is  not  contested  that  in 
banking  credit  the  quality  of  the  collateral  very  often  de- 
termines whether  or  not  the  loan  shall  be  made ;  for  many 
■who  could  command  little,  if  any  credit,  because  of  sraall- 
ness  of  means  and  poorness  of  reputation,  may  be  accom- 
modated if  they  can  produce  at  the  bank  acceptable  col- 
laterals. But,  on  the  other  hand,  much  of  the  business 
of  banking  credit  is  based  on  the  general  character,  the 
ability,  the  means  or  wealth,  and  the  reputation  for 
prompt  payment  of  the  borrower  and  his  indorsers.  Mr. 
Bagehot  remarks: 

"There  is  a  cardinal  difference  between  banking  and  other 
kinds  of  commerce ;  you  can  afford  to  run  much  less  risk  in  banking 
than  in  commerce,  and  you  must  take  much  greater  precautions." 

Every  one  will  quickly  recognize  the  force  of  this  state- 
ment. The  reasons  why  this  "  cardinal  difference "  ex- 
ists are  obvious.  Banks  and  bankers  are  trustees  for 
fimds  and  other  property  placed  with  them  for  safe  keep- 
ing. The  fact  that  depositors  entertain  sufficient  confi- 
dence in  banks  and  bankers  to  intrust  their  property  to 
them,  imposes  a  responsibility  which  thoughtful,  conscien- 
tious men  will  treat  with  a  prudence  indicating  the  high- 
est moral  purpose  and  endeavor.  It  is  certain  that  the 
very  essence  of  trusteeship  is  a  rigorous  regard  for  the 
interests  of  those  who  are  the  beneficiaries  of  the  trust,  and 
all  this  suggests  an  ability,  a  thoroughness,  an  economy, 
and  a  prescience  in  management  which  might  not  be  fol- 
lowed with  the  same  sense  of  exactitude  in  case  one  were 
simply  merchandising  or  speculating  with  his  own  prop- 
erty. In  addition,  it  is  hardly  necessary  to  call  attention 
to  the  fact  that  the  percentage  of  profits  in  banking  is 


BANKING  CREDIT  47 

smaller  than  in  most  commercial  callings;  and  this  em- 
phasizes the  need  of  extreme  care  in  the  lending  of  funds, 
for  a  loss  in  one  case  will  wipe  out  the  profits  of  a  mass 
of  transactions.  The  smallness  of  the  profit  also  necessi- 
tates an  advance  in  the  rate  of  interest  charged  where 
some  doubt  may  be  felt  as  to  the  desirability  of  the  loan. 
The  bank  exacts  a  greater  interest  charge  in  order  to  pro- 
tect itself  against  the  aggravated  possibility  of  loss.  This 
principle  is  so  firmly  embedded  in  banking  and  other 
branches  of  credit  that  it  is  accepted  as  a  matter  of 
course.  On  its  face  this  seems  an  injustice — that  the 
poorer  man  should  have  to  pay  the  higher  interest  charge. 
The  answer  is  that  the  rights  and  interests  of  the  depos- 
itors must  be  safeguarded  at  all  hazards ;  further,  the 
man  of  lesser  means  is  not  the  constant  active  force  in 
the  commercial  world  as  is  his  more  affluent  neighbor, 
and  the  injustice  spoken  of  finds  its  relief  in  the  opera- 
tions of  the  inviolable  law  of  averages. 

Adverting  to  the  application  of  credit  conditions  in 
the  relations  of  borrowers  and  bankers,  there  is  assumed 
the  consideration  of  what  may  be  said  to  be  a  more  prac- 
tical phase  of  the  study  of  credit,  as  differentiated  from 
its  technical  or  scientific  character.  The  relations  existing 
between  the  bank  and  its  customers  are  synonymous  with 
those  prevailing  between  commercial  creditor  and  debtor. 
In  the  latter  case  the  consideration  is  a  commodity  called 
merchandise ;  in  banking  credit,  a  commodity  known  as 
money — both  commodities  representing  degrees  of  value, 
one  depending  for  its  extrinsic  value  upon  the  ability  of 
the  merchant  to  dispose  of  his  goods,  and  the  other,  money, 
apparently  combining  elements  of  intrinsic  as  well  as  ex- 
trinsic value. 


48  CREDIT  AND  ITS  USES 

In  the  case  of  the  commercial  creditor  the  property  in- 
trusted to  the  debtor  invariably  consists  of  goods  or  mer- 
chandise. When  a  bank  affords  an  accommodation  to  a 
borrower  it  gives  him  the  use  of  funds,  this  use  being 
evidenced  by  a  credit  that  is  allowed  him.  Credit  is  also 
the  determining  factor  in  the  transaction  between  the 
merchant  and  the  debtor,  for  the  debtor  has  a  credit  con- 
ferred upon  him,  and  the  creditor,  in  his  turn,  holds  a 
credit  or  debt,  which  he  has  a  perfect  right  to  dispose  of 
for  his  own  uses,  and  in  many  cases  does  dispose  of  for 
the  purposes  of  his  business,  realizing  upon  it  the  neces- 
sary means  with  which  to  prosecute  that  business.  This 
analogy  between  banking  credit  and  commercial  or  mer- 
cantile credit  indicates  the  perfect  workings  of  the  credit 
system,  which  ramifies  through  all  economic  life.  It  is 
palpable  that  without  the  ministrations  of  banking  credit 
the  commercial  system  would  be,  as  stated,  "  an  unpromis- 
ing and  negligible  quantity." 


CHAPTER   IV 


CAPITAL    CEEDIT 


The  second  division  of  credit  is  capital  credit,  or  the 
credit  represented  by  bonds,  mortgages,  shares  in  incor- 
porated companies,  or  other  forms  of  long-time  invest- 
ments. The  title  given  to  this  division  of  credit  is  in 
accordance  with  the  nature  of  its  functions.  It  differs 
from  banking  credit,  the  latter  referring  entirely  to  that 
character  of  loan  business  where  the  loans  are  of  a  tem- 
porary nature,  as  the  vitality  of  banking  business  requires 
they  should  be.  It  will  be  recalled  that  any  tendency  on 
the  part  of  banks  to  lend  their  credit  or  funds  in  the 
form  of  permanent  capital  was  deprecated  in  the  preced- 
ing chapter,  and  in  this  consists  the  essential  difference 
between  banking  and  capital  credit.  Capital  credit  means 
the  employment  of  capital  in  credit  transactions  in  s  dif- 
ferent form  from  that  in  which  capital  is  invested  in  &. 
business  enterprise  by  those  who  expect  to  make  that  busi- 
ness their  occupation  and  realize  substantial  rewards  in 
the  shape  of  profits. 

It  may  be  asked  why  general  investors  should  not  ex- 
pect to  be  the  recipients  of  large  profits  to  the  same  extent 
as  any  other  type  of  investor.  The  difference  is  this: 
where  a  few  men  invest  their  funds  in  a  business,  those 
funds  invariably  represent  their  entire  available  means  or 

40 


50  CREDIT  AND  ITS  USES 

wealth.  Thej  are  working  for  themselves  alone,  and  the 
profits  of  the  business,  whatever  thej  may  be,  go  to  the 
owners  alone.  These  owners,  in  order  to  reap  this  profit 
— which  may  be  moderate  or  large,  according  to  the  nature 
of  the  business — have  placed  all  they  possess  at  the  risk 
of  the  business.  Its  failure  means  their  absolute  im- 
poverishment, with  all  attendant  hardships.  On  the  other 
hand,  the  general'  investor,  who  is  seeking  merely  a  nom- 
inal or  reasonable  interest  upon  the  funds  invested,  is 
careful  to  so  place  those  funds  that  his  investments  will 
be  very  well  distributed,  and  should  any  one  or  two  of 
them  prove  to  be  losing  ventures,  he  has  others  upon  which 
to  depend  for  an  income.  His  loss  then,  if  any,  is  a  par- 
tial one,  while  the  man  who  has  been  seeking  large  profits 
and  has  failed  will  in  all  probability  lose  all. 

One  of  the  important  things  in  which  the  people  should 
be  educated  is  to  understand  the  fallacy  of  a  large  earning 
capacity  for  money — that  is,  a  capacity  beyond  the  well- 
known  average  earning  rates  of  interest.  They  should 
appreciate  that  where  rates  above  those  which  have  a 
recognized  standing  are  promised  or  guaranteed,  if  paid 
in  any  cases,  it  has  been  at  the  expense  of  the  principal 
deposited,  or  by  other  dishonest  means.  Whether  the 
rank  and  file,  a  term  the  expressiveness  of  which  makes 
it  admissible,  can  ever  be  educated  to  a  comprehension  of 
such  conditions  is  problematical,  but  the  effort  should  be 
made  to  accomplish  so  worthy  a  purpose  even  if  the  pros- 
pects be  not  assuring. 

No  matter  to  what  element  in  the  commercial  or  finan- 
cial sphere  we  may  direct  our  attention,  we  find  it  de- 
pendent on  credit.  It  is  a  part  of  the  inner  nature  of 
every  branch  of  commercial  or  financial  activity,  and  the 


CAPITAL  CREDIT  51 

one  strong  reason  for  this  is  that  in  every  case  where  a 
loan  or  an  investment  is  made,  the  investment  is  made 
U];on  the  belief  of  the  party  acting  that  he  has  reason  to 
rely  upon  the  solvency,  the  soundness,  the  permanency  of 
the  credit  of  the  person  or  institution  with  whom  he  is 
dealing,  and  he  displays  that  "  confidence  upon  which 
credit  is  grounded." 

Capital  credit  or  investment  credit  arises  from  per- 
fectly natural  but  exacting  forces  or  causes.  In  times  of 
prosperity,  or  a  normal  state  of  the  commercial  system, 
it  makes  its  presence  felt  with  an  ease  that  no  artificial 
influences  could  account  for  or  command.  In  fact,  in 
such  times  it  needs  no  prompting  to  show  itself  and  dis- 
play its  energies.  Whenever  want  of  confidence  finds  its 
way  into  the  market,  with  lightning  rapidity  investments 
are  withheld  and  capital  seeks  the  storm  cellar. 

The  reasons  for  making  investments  may  be  briefly 
stated.  First,  capital  unemployed  involves  insecurity.  It 
may  be  deposited  in  hands  which  through  some  unlooked 
for  happening  might  prove  to  be  unreliable.  Hoarded 
near  the  person  there  is  all  the  danger  of  fire  or  thieving, 
and  the  security  of  capital  demands  that  it  should  not  be 
left  subject  to  any  of  these  contingencies,  but  placed  under 
auspices  where  the  possibility  of  danger  and  loss  are 
minimized.  Second,  capital  seeks  a  spot  where  its  utilities 
may  be  exercised  in  yielding  a  reward  in  the  shape  of  a 
reasonable  interest  for  its  owner.  Capital  which  is  not 
earning  a  reward  is  useless  in  every  way.  It  adds  noth- 
ing to  the  income  or  means  or  prospects  of  the  owner  or  of 
the  world  at  large.  The  interests  of  society  require  that 
capital  should  be  invested,  not  only  that  its  owners  may 
have  the  means  of  support  which  its  earning  capacity  will 


52  CREDIT  AND  ITS  USES 

provide,  but  that  the  social  system  may  have  the  benefits 
of  its  existence.  Third,  the  productive  capacity  of  the 
world  will  be  strengthened  and  augmented  by  the  use  of 
capital.  Its  non-employment  imposes  upon  such  capital  as 
is  active  an  abnormal  burden,  subjecting  it  to  too  large 
a  share  of  the  responsibilities  and  toils  generated  by  the 
demands  of  society,  unduly  sapping  its  vitality.  On  the 
other  hand,  a  general  and  steady  employment  or  invest- 
ment of  capital  distributes  its  burdens  and  responsibili- 
ties in  a  manner  that  effectively  promotes  an  evenness 
and  fullness  of  productivity  to  the  betterment  of  all 
mankind. 

The  next  step  is  to  investigate  the  avenues  through 
which  investment  funds  are  mainly  drawn.  In  his  lec- 
ture on  "  Investments,"  Mr.  D.  R.  Forgan,  Vice-President 
of  the  First  National  Bank  of  Chicago,  explained  these 
sources  in  the  follovdng  very  descriptive  summary: 

"1.  Savings  banks'  deposits,  representing  not  an  expansion  of 
commercial  credit,  but  the  savings  of  the  common  people. 

"2.  That  portion  of  the  deposits  of  commercial  banks  which 
represents  the  accumulation  of  the  profits  of  business  and  which 
may  be  \vithdrawTi  from  business. 

"3.  The  funds  of  life  and  fire  insurance  companies. 

"4.  The  funds  of  educational,  charitable,  and  benevolent  insti- 
tutions, 

"5.  The  fimds  of  estates  in  cases  where  the  executors  decide 
to  exchange  the  assets  at  risk  of  general  business  for  permanent 
investments,  which  call  for  no  business  management  on  the  part  of 
the  owner. 

"6.  The  funds  of  retired  business  men  who  follow  the  same 
course  for  similar  reasons. 

"7.  The  investment  accounts  of  commercial  banks  maintained 
for  the  purpose  of  having  some  assfit,s  which  can  be  converted  into 
cash  immediately  in  case  of  need. 


CAPITAL  CREDIT  53 

"8.  That  portion  of  the  increment  derived  from  former  invest- 
ments which  the  holders  do  not  spend." 


The  availability  of  these  funds  for  investment  pur- 
poses is  predicated  upon  the  very  reasons  set  forth,  as, 
(1)  Security,  (2)  Earning  Power,  and  (3)  The  Assist- 
ance of  Productivity,  and  very  little  thought  on  the  matter 
will  show  how  cogently  these  reasons  influence  those  in 
charge  of  these  numerous  and  very  diverse  sources,  to 
provide  themselves  with  the  best  character  of  investment 
the  market  affords.  Another  very  strong  reason  why 
people  or  interests  desire  to  invest  their  ready  capital  in 
reliable  and  well-earning  enterprises  is  the  fact  that  the 
capital,  having  been  so  disposed,  relieves  them  of  the 
necessity  of  giving  it  personal  supervision,  and  their  part- 
ing with  it  involves  an  immediate  and  radical  change  of 
supervisors  or  guardians.  In  many  cases  this  change  is 
advisable  and  desirable.  It  may  be  that  a  man  has  no 
longer  the  capacity  with  which  to  apply  himself  to  ar- 
duous business  duties,  and  the  fact  of  his  being  able  to 
secure  for  his  capital  a  safe  home  where  it  will  earn  for 
him  a  steady  income,  not  only  relieves  his  mind  of  a  great 
strain,  but  affords  him  a  revenue  which  is  sufficient  prob- 
ably for  his  needs,  and  all  without  the  necessity  of  his 
unduly  risking  or  impairing  that  capital  in  the  slightest 
respect. 

Having  considered  some  of  the  reasons  for  the  prompt, 
steady,  and  safe  investment  of  funds,  it  is  in  order  to  re- 
view the  different  forms  of  investment  which  are  usually 
employed.  These  forms  cover  a  wide  range  of  natural, 
financial,  and  industrial  forces,  but  as  far  as  the  elements 
of  capital  credit  are  concerned,  the  same  requirements  aud 


54  CREDIT  AND  ITS  USES 

influences  apply.     These  forms  of  investment  are  usually 
the  following: 

A.  Bonds  and  mortgages,  real  estate. 

B.  Government  bonds. 

C.  State  bonds. 

D.  Municipal  bonds. 

Public-service  utilities,  as, 

E.  Railroad  bonds  and  shares. 

F.  Municipal  street-car-line  bonds  and  shares. 

G.  Telegraph  and  telephone  securities. 
H.  Gas  and  electric  lighting  securities. 

I.  Waterworks  bonds. 
J.  General  industrial  securities. 
K.  Bank  and  trust  company  shares. 

Investments  in  bonds  and  mortgages  covering  real  es- 
tate have  long  been,  and  probably  will  always  continue  to 
be,  a  favorite  recourse  of  capital.  Eeal  estate  is  to  a  great 
extent  the  oldest  form  of  investment. 

The  modernity  of  corporate  credit  proves  the  mother- 
hood of  real-estate  investment  or  credit,  and  it  is  likely 
that  for  the  purposes  of  a  large  class  of  investors  this 
motherhood  has  powerful  attractions.  Mr.  Macleod  has 
advanced  some  very  interesting  theories  on  the  question  of 
what  he  calls  "  property  in  land,"  especially  in  respect 
to  the  subject  of  credit,  and  submits  this  proposition : 

"Suppose  that  we  saw  a  piece  of  land  on  which  there  were 
actually  existing  products  of  the  value  of  £3,000.  Suppose  that 
we  wished  to  purchase  that  piece  of  land.  Would  the  ouTier  of  the 
land  be  content  to  sell  it  to  us  for  £3,000?  Most  assuredly  not. 
He  would  say  that  though  there  were  only  products  of  the  value  of 
£3,000  on  the  land  in  actual  existence  at  the  present  time,  yet  that 
land  would  produce  a  similar  amount  of  products  to  the  end  of  time. 
He  would  say  that  we  must  purchase  not  only  the  right  to  the 
existing  products  of  the  land,  but  also  the  right  to  the  annual 


CAPITAL  CREDIT  55 

products  of  the  land  to  the  end  of  time — that  is,  an  infinite  series 
of  future  products  which  will  only  come  into  existence  year  by  year." 

"Thus  property  in  land  consists  of  two  perfectly  distinct  parts: 
the  right  to  the  products  which  have  already  come  into  existence; 
and  the  right  to  the  products  which  will  only  come  into  existence  in 
future." 

This  statement  of  the  matter,  which  is  authoritatively 
fundamental,  proves  that  in  real-estate  investments  much 
depends  not  only  on  the  present  value  of  the  land  and  its 
appurtenances,  but  upon  the  possibilities  of  an  enhance- 
ment in  value.  These  possibilities  are  represented  by  the 
actual  produce  which  the  land  may  bring  forth,  and  also 
its  adaptability  to  other  elements  of  improvement,  such 
as  manufacturing  or  even  dwelling  purposes.  The  point 
which  determines  this  improvement  is  the  desire  or  de- 
mand for  its  utilization  in  a  way  that  will  lead  to  an  ad- 
vance in  earning  capacity.  This  earning  capacity  is  rep- 
resented economically  by  the  productive  opportunities  or 
enhancements  obtainable.  Therefore,  the  productive  ca- 
pacity and  enhancements  in  value  typified  by  earning 
power,  represent,  as  Mr.  Macleod  claims,  "  the  credit  of 
the  land."  The  possibilities  for  improvement  in  value, 
i.  e.,  earning  power,  are  certainly  of  the  greatest  moment 
where  an  investment  in  real  estate  is  contemplated,  al- 
though they  are  very  often  not  given  deserved  attention. 
The  transaction  usually  hinges  upon  the  percentage  of 
margin  represented  in  the  loan  (the  leeway  being  from 
forty  to  fifty  per  cent)  and  the  probability  of  this  margin 
being  sustained  during  the  life  of  the  bond  and  mortgage. 
Where  such  securities  are  permitted  to  nm  for  a  long  term 
of  years,  it  will  be  seen  how  important  it  is  that  the 
"  credit  of  the  land  "  shall  be  not  only  a  well-sustained 


66  CREDIT  AND  ITS  USES 

one,  but  an  advancing  one,  in  order  that  the  ratio  of  mar- 
gin may  be  constantly  increasing,  thus  insuring  the  greater 
safety  of  the  principal  at  stake,  and  where  a  piece  of  prop- 
erty is  yielding  steady  and  strong  profits,  the  better  capac- 
ity there  will  exist  for  the  prompt  payment  of  interest 
and  other  necessary  charges.  Further  than  this,  when 
values  are  advancing  with  steadiness,  there  is  the  oppor- 
timity  of  securing  larger  advances  of  capital  for  the  pro- 
motion of  its  productive  power,  involving  a  progressive 
state  of  the  world's  wealth,  economically  and  socially. 

From  all  this  must  be  eliminated,  as  having  any  proper 
relationship  to  wise  investment,  the  placing  of  loans  or 
capital  in  quarters  which  are  under  or  subject  to  what 
are  called  "boom"  conditions.  This  is  simply  a  species  of 
the  wildest  speculation,  in  which  the  element  of  tangible 
credit  in  the  land  is  entirely  lost  sight  of,  and  people 
operate  in  land  in  the  same  reckless  manner  as  they  enter 
into  other  speculative  ventures.  No  character  of  specula- 
tion, when  its  force  has  been  spent  and  "  the  bottom 
dropped  out,"  leaves  a  community  in  a  more  impoverished 
condition  than  that  which  obtains  in  the  proverbial  "  boom 
town."  It  is  true  that  the  most  substantial  fortune  which 
has  ever  been  created  in  this  country  is  the  result  of  land 
investments,  but  this  fortune  represents  not  the  results 
of  "  speculation "  but  the  most  prudent  character  of 
capital  investment,  and  its  vast  increment  is  a  tribute  to 
the  financial  genius  of  the  man  who  foresaw  this  "  credit 
in  the  land."  Possibly  some  exception  will  be  taken  to 
the  statement  that  this  fortune  is  the  most  substantial  that 
we  know  of ;  but  is  the  point  subject  to  argument  ?  It  is 
not  the  greatest  fortune  in  volume,  by  any  means,  but  it 
represents  certain  natural  forces  which  are  not  liable  to 


CAPITAL  CREDIT  57 

the  shrinkage  that  is  apt  to  overtake  other  great  fortunes 
any  time;  it  is  not  subject  to  the  intense  jealousies  the 
volume  of  other  great  fortunes  has  aroused ;  it  is  not  sub- 
ject to  the  constant  criticism,  espionage,  and  attack  from 
legislative  sources  that  other  fortunes  must  constantly  cope 
with ;  it  is  not  amenable  to  the  imminence  of  government 
regulation,  and  possible  govermnent  ownership  which 
other  interests  must  face,  with  a  consequent  diminution 
in  earnings,  for  the  inevitable  tendency  of  government 
regulation  is  a  reduction  in  charges  to  the  people,  and  this 
will  involve  a  reduction  in  returns  to  the  investors  in 
many  different  forms  of  public-service  utilities. 

The  second  of  the  stated  series  of  investments  are 
those  known  as  national,  state,  and  municipal  securities. 
It  is  purposed  to  extend  to  these  branches  of  capital  credit 
a  more  specific  description  in  the  succeeding  chapter,  to 
which  they  are  more  closely  related,  but  their  mention  at 
this  time  is  essential  to  an  orderly  statement  of  the  usual 
proclivities  of  those  who  invest  their  capital.  These  in- 
vestments are  graded  in  proportion  to  the  "  credit  stand- 
ing "  of  the  different  governmental  entities  from  which 
they  emanate. 

IText  in  order  may  be  named  investments  which  belong 
to  the  family  of  public-service  utilities.  The  latter  term 
is  not  always  employed  in  the  broad  sense  that  would 
cover  great  national  railroad  systems,  express  companies, 
or  domestic  marine  facilities,  which  are  more  generally 
referred  to  as  "  common  carriers."  The  investment  in 
bonds  and  shares  of  railroads  is  one  of  the  most  popular 
forms  of  capital  credit,  although  the  shares  representing 
both  preferred  and  common  stock  of  these  corporations 
are  the  basis  of  the  greatest  system  of  public  gambling  the 


58  CREDIT  AND  ITS  USES 

world  has  ever  kno'un.  Tlie  bonds  of  strong  railroad  com- 
panies are  among  the  best  investments,  but  there  is  neces- 
sity for  caution  in  respect  to  even  them,  which  is  illus- 
trated in  the  requirement  of  certain  States  that  the  bonds 
of  railroads  shall  only  be  available  for  investment  pur- 
poses on  the  part  of  savings  banks  (than  which  there  is 
no  more  sacred  trust)  on  condition  that  the  roads  shall 
have  acquired  and  preserved  for  a  specified  period  a  cer- 
tain average  interest-paying  capacity.  This  well-consid- 
ered and  necessary  legislative  requirement  has  established 
a  standard  of  credit  which  the  management  of  every  road 
naturally  desires  to  enjoy,  and  it  imposes  not  only  the 
responsibility  but  the  incentive  to  reach  the  required  state 
w^hich  will  give  the  corporation  the  standing  and  reputa- 
tion involved  in  the  condition  laid  down. 

There  are  many  different  elements  which  enter  into 
the  credit  standing  of  a  railroad  corporation,  for  it  is 
upon  its  credit  standing  that  it  must  depend  for  a  prompt 
and  effective  sale  of  its  securities.  A  short  time  ago  one 
of  the  gi'eat  railroad  systems  of  this  country,  contemplat- 
ing a  vast  scheme  of  extensions  and  betterments,  an- 
nounced a  very  considerable  issue  of  new  stock.  There 
were  some  who  thought  that  owing  to  certain  unhealth- 
ful  conditions  of  the  market  this  was  an  ill-advised  under- 
taking. In  the  face  of  much  public  pessimism  the 
securities  offered  were  accepted  and  assimilated  by  the 
investment  market  with  an  alacrity  that  was  pleasing  as 
a  measure  of  general  financial  confidence,  but  also  highly 
complimentary  as  well  as  advantageous  to  the  reputation 
of  the  particular  railroad  in  showing  that  its  credit  was 
of  the  most  stable  character.  Among  the  qualities  that 
contribute  to  the  credit  of  a  railway  corporation,  and,  as 


CAPITAL  CREDIl  59 

a  corollary,  the  desirability  of  its  bonds  for  Investment 
purposes,  may  be  mentioned : 

(1)  The  extent  and  value  of  its  holdings. 

(2)  Advantages  of  environment : 

(a)  Agricultural. 

(6)  Manufacturing  and  commercial. 

(c)  Municipal. 

(3)  Convenient  and  good  class  of  railroad  connections. 

(4)  Management. 

(5)  Equipment. 

(6)  Service. 

(1)  The  real  property  of  a  railroad  Is  one  of  its  sub- 
stantial assets.  This  real  property  may  consist  of  rights 
of  way  and  termini,  and  also  considerable  tracts  of  land 
abutting  the  rights  of  way.  This  property  is  very  often 
acquired  by  subvention  from  the  government  or  locality 
through  which  the  road  is  passing,  and  it  is  also  an  object 
to  a  great  railroad  to  possess  valuable  lands  on  its  route 
so  that  it  may  be  the  beneficiary  of  their  productive 
capacity:  for  instance,  mineral  lands  and  timber  proper- 
ties. These  not  only  redound  to  the  benefit  of  the  road 
through  profits  acquired  from  leasing  or  selling  them  to 
others  who  may  desire  to  operate  or  exploit  them,  but 
through  the  revenue  derived  from  the  business  of  moving 
the  products  of  these  different  chambers  of  industrial 
activity. 

(2)  The  nature  of  a  territory  through  which  a  rail- 
road operates  is  a  vital  element  in  its  success ;  a  road 
traversing  an  arid  country  with  few  manufacturing  inter- 
ests, and  not  touching  any  important  commercial  centers, 
is  a  proposition  doomed  to  failure.  The  latter  picture 
may  seem  to  be  an  extravagant  one,  but  it  is  not,  as  there 


00  CREDIT  AND  ITS  USES 

have  been  many  euch.  As  a  rule,  these  untoward  enter- 
prises are  projected  with  a  view  to  finally  connecting  with 
or  forming  a  link  of  some  already  well-established  road, 
or  one  having  considerable  promise,  and  in  that  way 
ultimately  bringing  about  an  association  that  will  be 
an  advantageous  one.  On  the  other  hand,  a  road  pass- 
ing through  a  richly  agricultural  domain,  with  important 
cities  and  manufacturing  utilities  to  draw  from,  taps  the 
vitalities  of  these  sources  of  trade,  and  the  freight  and 
passenger  business  acquired  is  a  valuable  one.  A  word 
as  to  the  influence  upon  a  railroad  enterprise  exerted  by 
its  proximity  to  leading  financial  quarters.  The  element 
of  contiguity  is  a  powerful  help  in  the  maintenance  of  a 
good  reputation  and  enables  a  road  to  market  its  securi- 
ties to  great  advantage,  other  conditions  being  equal.  It 
might  be  said  that  so  large  an  amount  of  foreign  capital 
being  represented  in  the  holdings  of  American  railroads 
would  be  a  contradiction  of  this  theory,  but  it  does  not 
affect  the  question,  distribution  of  capital  being  an  eco- 
nomic necessity  and  practice. 

(3)  Desirable  connections  are  a  necessary  adjunct  of 
successful  railroading,  for  they  contribute  to  the  comfort 
of  individuals  and  also  expedite  travel,  as  well  as  secure 
quick  transfers  of  freight.  They  are  also  an  enabling  in- 
fluence in  the  promotion  of  closer  and  better  business 
arrangements  with  other  roads,  which,  necessarily,  have 
a  great  bearing  upon  the  opportunities  of  the  road  for 
transacting  its  business. 

(4)  The  quality  and  influence  of  the  management  of 
a  railroad  depend  entirely  upon  the  question  of  person- 
ality. When  one  considers  the  number  of  enterprises, 
railroad  and  other,  which  fall  into  disrepute,  bringing  loss 


CAPITAL  CREDIT  61 

and  sometimes  poverty  to  investors,  the  necessity  of  good 
management  is  manifest.  It  will  be  no  answer  to  say 
that  in  great  corporations  (railroad  and  others)  the 
systems  evolved  for  their  management  will  largely  carry 
the  business  through,  for  no  system,  however  well  con- 
sidered, ramified,  or  specialized,  will  be  adequate  unless 
directed  by  the  highest  type  of  human  ability.  Every 
day  produces  some  new  necessity  in  business  administra- 
tion, and  the  greater  the  business,  the  greater  will  be  the 
necessities.  These  necessities  cannot  be  met  and  solved  by 
system  alone.  System  is  an  inanimate  thing;  it  may 
serve  for  a  time  to  regulate;  it  cannot  devise,  invent,  or 
create. 

(5)  The  character  of  the  equipment  is  another  impor- 
tant feature  of  a  railroad's  standing  and  earning  power — 
and  this  refers  to  freight  as  well  as  passenger  facilities. 
Good  equipment  promotes  safety  and  comfort,  and  these 
are  considerations  entering  into  the  calculations  of  people 
in  determining  the  character  of  a  railroad.  A  road  having 
a  reputation  for  poor  forwarding  and  dispatching  facili- 
ties, for  accidents  and  ^vTecks,  with  much  loss  of  life  (and 
also  loss  to  itself  in  equipment  and  damage  penalties), 
loses  in  character  and  injures  its  credit.  It  may  be 
pointed  out  that  accidents  and  %\Tecks  are,  to  an  extent,  an 
inevitable  consequence  of  railroading,  that  provision  is 
undoubtedly  made  for  them  in  the  preparation  of  budg- 
ets; also,  that  some  very  important  roads  have  had  ex- 
tremely serious  ■\\Tecks  attended  with  an  undue  percentage 
of  loss  of  life,  and  that  it  does  not  impair  the  value  or 
marketability  of  their  securities.  There  no  doubt  are 
instances  of  this  chfxracter  relating  to  some  very  powerful 
and  long-established  systems,  and  while  their  unfavorable 


62  CREDIT  AND  ITS  USES 

experiences  may  not  seem  to  have  had  any  appreciable 
effect  upon  the  marketability  of  their  securities,  the  bal- 
ance sheet  must  have  been  affected  to  the  extent  that  such 
losses  would  figure,  and  this,  it  will  be  admitted,  has  a 
direct  effect  upon  the  earning  capacities  of  these  systems. 

(6)  Service  is  a  leading  factor  in  the  reputation  of  a 
railroad.  Attention,  kindliness,  and  courtesy  popularize 
a  road.  In  cases  where  a  railroad  has  a  monopoly  of  a 
certain  territory,  and  takes  advantage  of  this  monopoly 
to  so  economize  in  its  service  and  equipment  as  to  cause 
discontent  among  its  patrons,  it  is  obvious  that  its  repu- 
tation is  to  that  extent  impaired.  This  discontent  may 
lead  to  the  organization  of  a  competing  line,  or  an  erup- 
tion of  local  feeling  and  influence  in  favor  of  some  method 
that  would  cause  a  cessation  of  the  monopoly. 

It  may  be  claimed  that,  after  all,  the  balance  sheet 
and  no  mere  sentimental  considerations  determine  the 
acceptability  of  a  bond  upon  the  market ;  but  all  these 
qualities  or  influences  have  a  bearing  upon  the  balance 
sheet. 

In  all  public-service  utilities  the  nature  and  assumed 
value  of  the  franchise  is  a  significant  item.  It  lacks 
tangibility  except  as  far  as  past  earning  capacity  may 
enable  one  to  determine  upon  an  approximate  value,  for 
the  breaking  of  a  monopoly  represented  in  the  franchise, 
or  a  greater  degree  of  competition  where  no  monopoly 
existed,  will  impair  the  earning  power,  and  in  this  way 
reduce  if  not  almost  obliterate  the  value  of  the  franchise. 

A  railroad  bond  is  supposed  to  represent  the  actual 
pro])erty  of  the  road,  franchises  and  all  other  property, 
corporeal  and  incorporeal.  The  following  description, 
taken  at  random  from  a  number  of  bond  offerings,  will 


CAPITAL  CREDIT  63 

suffice  to  indicate  the  nature  of  the  security  behind  a 
bond,  although  the  character  and  volume  of  the  collateral 
is  a  matter  of  individual  and  constant  variance. 

"The  entire  capital  stock  of  the  Rio  Grande  Western  Railway 
is  owned  by  the  Denver  &  Rio  Grande  Railroad  Company,  eighty- 
five  in  cash  having  been  paid  for  the  Common  Stock,  and  an  exchange 
made  for  the  Preferred  Stock  on  the  basis  of  eleven  shares  of  Denver 
&  Rio  Grande  for  ten  shares  of  Rio  Grande  Western.  At  the  time 
that  the  Denver  &  Rio  Grande  acquired  control  of  the  Rio  Grande 
Western  the  latter  company  was  paying  five  per  cent  dividends  on 
its  $17,500,000  of  capital  stock.  The  above  bonds  are  secured  by 
a  First  Mortgage,  either  directly  or  by  ownership  of  all  their  secur- 
ities, upon  193  miles,  and  also  a  mortgage  upon  the  rest  of  the  mile- 
age, subject  to  a  limited  issue  of  $15,200,000  First  Mortgage  4's, 
due  1939,  for  the  redemption  of  which,  at  maturity,  bonds  of  this 
issue  are  reserved.  In  addition,  the  bonds  will  be  secured  by  a 
First  Mortgage  upon  any  new  mileage  at  the  rate  of  not  exceeding 
$20,000  per  mile.  This  issue  is  further  secured  by  a  First  Mortgage 
upon,  and  by  deposit  with  the  Trustee  of,  the  entire  issue  of  $10,- 
000,000  Capital  Stock  of  the  Utah  Fuel  Company,  acquired  at  a 
cost  of  between  $5,000,000  and  $6,000,000.  The  latter  company 
owns  and  operates  valuable  coal  mines  in  Utah  and  Colorado, 
covering  about  36,000  acres,  and  estimated  to  contain  over  200,000,- 
000  tons  of  available  coal.  It  has  several  hundred  coke  ovens 
in  operation,  and  the  market  for  this  coal  and  coke  includes  the 
territory  from  Colorado  to  the  Pacific  coast." 

The  property  covered  therefore  may  be  that  of  auxil- 
iary or  subsidiary  roads,  that  of  a  cognate  enterprise  such 
as  the  fuel  company  referred  to,  as  well  as  any  new 
mileage  acquired  and  constructed.  The  property  and  the 
credit  of  these  different  concerns  are  all  pledged  as 
security  for  an  output  of  bonds. 

The  conditions  affecting  the  class  of  securities  under 
discussion  may  be  said  to  apply  to  all  public  utility  or 
service  enterprises,  and  the  merits  they  should  possess  have 


64  CREDIT   AND  ITS  USES 

been  set  forth  with  particularity  for  that  reason.  The  same 
general  principles  would  affect  the  securities  of  street-car 
lines,  telegraph  and  telephone  companies,  gas  and  electric- 
light  companies,  and  others. 

There  is  another  class  of  investments  which  during 
the  past  generation  has  assumed  a  leading  place  in  capital 
credit,  commonly  referred  to  as  industrials.  Industrials 
represent  productive  enterprises,  manufacturing  and  com- 
mercial, and  hold  an  important  place  in  the  investment 
market.  There  is  probably  no  class  of  investment  attended 
with  so  much  danger  and  at  the  same  time  one  under 
which  a  better  percentage  of  steady  interest  may  be 
realized  under  proper  capitalization  and  management. 
One  of  the  demerits  of  the  industrial  school  is  illustrated 
by  the  fact  that  (incorporation  being  so  easy  and  com- 
paratively inexpensive)  prosperous  times  induce  many 
to  undertake  the  formation  of  so-called  combinations  and 
individual  corporations,  and  to  simply  flood  the  market 
with  their  securities.  The  one-day  panic  in  the  stock 
market  in  April,  1899,  was  due  to  an  unwillingness  on 
the  part  of  the  banks  to  accord  full  recognition  to  such 
securities,  and  this  wise  movement  so  early  in  the  indus- 
trial propaganda  has  had  a  healthful  effect.  It  is  un- 
necessary to  refer  by  name  to  the  numerous  and  prominent 
failures  to  exploit  certain  industrial  propositions  during 
the  period  1897-1902,  for  the  volume  of  undigested  se- 
curities which  figured  during  that  period  is  sufficiently 
suggestive. 

An  industrial  security  is  one  that  may  be  said  to  be 
nearer  the  people  than  railroad  and  other  securities.  One 
of  the  inducements  offered  to  the  small  investor  is  to  hold 
an  interest  in  the  company  for  which  he  may  be  work- 


CAPITAL  CREDIT  65 

ing.  This  temptation  appeals  alike  to  all  classes,  officers 
as  well  as  employees  of  a  corporation,  and  is  one  with 
considerable  force  to  it.  The  thing  to  guard  against  on 
the  part  of  small  investors  (as  many  employees  of  such 
a  company  would  necessarily  be),  and  general  investors 
as  well,  is  the  danger  of  making  an  investment  where  the 
returns  are  not  permanent  or  are  likely  to  be  unduly 
affected  by  untoward  trade  conditions. 

The  basis  of  capitalization  is  a  vital  one  with  any 
character  of  corporation.  The  industrial  corporation  is 
one  in  which  overcapitalization  is  most  generally  prac- 
ticed, and  it  is  hard  to  determine  just  how  much  is  or 
how  much  is  not  water.  In  fact,  the  mania  for  large  and 
high-sounding  figures  is  such  that  actual  values  as  a  basis 
of  capitalization  seem  to  many  a  financial  anachronism. 
The  question  of  the  proper  basis  of  capitalization  is  one 
that  cannot  be  hastily  decided,  and  one  also  dependent 
on  many  conditions ;  each  concern  must  be  judged  by  the 
circumstances  surrounding  it.  Professor  Jenks,  in  "  The 
Trust  Problem,"  has  given  this  subject  a  very  impartial 
judgment,  and  says: 

"It  is  generally  assumed  that  the  actual  cash  value  will  repre- 
sent fairly  well  the  cost  of  the  reproduction  of  the  properties  in 
present  condition  together  with  needed  running  capital  in  the  form 
of  cash  on  hand.  Such  an  issuance  of  stock  in  an  ordinary  manu- 
facturing business,  under  conditions  of  fair  competition,  will  give 
dividends  in  the  long  run  probably  not  materially  different  from, 
but  perhaps  somewhat  higher  than  the  usual  rate  of  interest  in  the 
community." 

"On  the  other  hand,  most  business  men  are  of  the  opinion  that 
the  value  of  any  property  depends  upon  its  earning  capacity,  its 
value  as  '  a  going  concern,'  and  that  it  is  wise  and  just  to  issue  stock 
of  a  corporation  on  that  basis." 


66  CREDIT  AND   ITS   USES 

"  Attention  is  frequently  called  to  the  case  of  a  newspaper  with 
a  tangible  property  of,  say,  $100,000.  Such  a  newspaper,  ably  ed- 
ited, with  a  strong  constituency  of  subscribers  and  a  large  adver- 
tising patronage,  might  readily  pay  good  dividends  on  $1,000,000 
or  more.  Why  should  not  the  capitalization  not  be  placed  at 
$1,000,000  regardless  of  what  the  plant  might  cost?  The  earning 
capacity  may  be  due  largely  to  the  skill  of  the  editor,  or  to  the  fact 
of  connection  with  some  political  party,  or  to  the  peculiar  business 
skill  of  its  advertising  manager,  or  to  the  good  will  gained  through 
many  years  of  skillful  catering  to  the  public  taste.  Why,  it  is 
asked,  should  not  the  capitalization  be  made  upon  its  earning 
capacity  rather  than  on  the  reference  to  the  cost  of  the  plant?  .  .  . 

"Even  capitalization  at  the  reproduction  value  of  the  plants 
may  be  as  misleading  in  many  ways  as  capitalization  on  supposed 
earning  capacity,  because  unskillful  management  or  a  changing 
state  of  the  market  may  either  double  the  value  of  the  plant  or 
halve  it  within  a  year  or  two,  if  we  are  to  take  as  the  basis  of  value 
what  it  might  actually  bring  in  the  market,  which  depends  again, 
...  on  its  earning  capacity." 

There  are  strong  arguments  on  both  sides  of  the  ques- 
tion, and  it  is  not  proposed  to  make  any  extended  investi- 
gation into  this  branch  of  the  question.  It  should  not  be 
difficult  to  decide  as  to  whether  the  bonds  of  an  industrial 
corporation  are  reasonably  protected  and  therefore  reason- 
ably safe,  but  the  greatest  sin  committed  in  the  name  of 
industrial  finance  is  the  issuance  of  a  mass  of  preferred 
and  common  stocks  which  have  little  if  anything  of  col- 
lateral strength  behind  them.  These  stocks  can  be  said 
to  be  without  a  "  credit  basis,"  and  such  being  their  char- 
acter, they  should  have  no  standing  as  investments.  On 
this  point  Mr.  D.  R.  Forgan  expresses  this  opinion : 

"Common  stocks  composed  entirely  of  water  and  given  away 
as  a  bonus  to  help  sell  the  preferred  cannot  be  classed  as  investments, 
and  many  of  the  preferred  stocks  represent  so  extravagant  capital- 
ization that  they  also  should  be  avoided." 


CAPITAL  CREDIT  67 

The  elements  of  safety  to  be  studied  in  capital  credit 
are:  (1)  the  subjective  nature  of  the  enterprise;  (2)  its 
character  for  permanency  of  demand;  (3)  the  actual  value 
of  its  holdings;  (4)  the  comparative  value  or  merits  of 
its  franchises,  patents,  etc. ;  (5)  its  ability  to  earn  a 
reasonable  and  steady  interest  on  the  investment;  and 
(6)  the  character  of  its  management. 


CHAPTER   V 
PUBLIC    credit:    national,    statp;,   and   municipal 

CREDIT 

The  different  races  of  the  earth  are  represented  by 
many  diverse  forms  of  nationhood.  Where  the  advance- 
ment in  business  economy,  in  the  arts,  the  sciences,  and 
other  indications  of  a  progressive  civilization  are  of  a 
marked  character,  the  nations  so  distinguished  must  look 
to  credit  as  one  of  the  great  enabling  influences  in  their 
efforts  to  achieve  commercial  supremacy  and,  its  con- 
comitant, national  glory.  This  applies  especially  to  the 
requirements  of  modern  times,  for  it  is  an  incontrovertible 
fact  that  to-day  any  nation  which  is  not  in  high  credit  and 
therefore  able  to  command  prompt  financial  aid  for  such 
undertakings  as  may  seem  necessary  or  advisable — viz., 
v^^ar,  great  internal  improvements,  acquisition  of  foreign 
territory,  or  any  of  the  numerous  sources  of  activity 
which  are  part  of  the  life  of  every  great  country,  will 
find  her  course  to  progress  blocked,  and  national  retro- 
gression a  result. 

Attention  has  been  called  to  the  power  of  the  banking 
community  in  directing  as  well  as  almost  regulating  the 
affairs  of  the  world ;  and  the  nation  which  has  incurred  the 
displeasure  of  that  great  power  labors  under  tremendous 
difficulties.  The  moral  aspect  of  any  people  will  be  re- 
68 


PUBLIC  CREDIT  69 

fleeted  in  the  character  of  their  credit  as  a  nation.  The 
basis  of  public  or  national  credit  is  relatively  the  same  as 
that  of  individuals  or  small-sized  collective  bodies  or  the 
largest  corporations. 

High  credit  is  indispensable  in  modern  society,  not 
only  on  the  part  of  individuals  but  nations,  for  without  it 
the  intensely  exacting  demands  and  necessities  of  this  age 
of  specialized  endeavor  cannot  be  satisfied. 

Wherever  there  is  credit  there  is  debt.  If  it  were  not 
for  the  latter  there  would  be  no  necessity  for  the  former. 
It  is  the  duty  of  commanding  the  use  of  certain  things 
that  brings  credit  into  play,  and  it  is  also  this  duty  that 
is  the  genesis  of  a  debt.  The  word  duty  is  used  in  order 
to  distinguish  the  desires  which  find  their  source  in  legit- 
imate necessity  from  those  which  are  the  offspring  of 
mere  caprice,  v;liim,  or  pleasure.  When  the  use  of  credit 
is  invoked  because  of  the  latter,  and  sustains  the  slightest 
overstraining  in  order  to  gratify  them,  there  an  abuse  of 
credit  has  taken  place,  with  a  corresponding  loss  to  the 
productive  functions  of  capital. 

National  debts  are  not  of  great  age,  for  generations 
themselves  are  but  milestones  in  the  life  of  a  people,  and 
the  debts  of  the  foremost  nations  of  the  earth  are  the 
product  of  the  past  two  centuries.  That  of  England  dates 
from  the  last  decade  of  the  seventeenth  century,  or  from 
the  period  when  there  were  firmly  laid  the  foundations 
of  that  national  supremacy  which  she  has  since  so  effect- 
ively maintained. 

The  causes  leading  to  the  creation  of  public  debts  are 

"war  expenditures,"  "public  works,"  and  "funded  debts." 

Expenditures    for   war   purposes   have    always   been   the 

most  burdensome  that  a  nation  has  to  meet.     The  capital 
6 


70  CREDIT  AND  ITS  USES 

^vbich  is  utilized  in  the  prosecution  of  a  war  (especially 
one  of  the  modern  character,  where  the  outlays  run 
"  into  a  million  a  day  ")  is  capital  the  use  of  which  yields 
nothing  in  behalf  of  the  productive  welfare  of  the  people. 
Let  us  consider  what  a  blessing  it  would  be  if  the  funds 
which  have  been  consumed  in  conducting  the  Russo- 
Japanese  war  had  been  used  by  these  nations  in  the 
productive  arts.  Think  of  the  vast  new  acreage  which 
could  be  opened,  the  splendid  results  which  the  applica- 
tion of  modern  agricultural  tools  would  produce,  the  great 
factories  that  could  be  constructed,  the  new  industries  in- 
troduced, the  incalculable  knowledge  imparted  to  the  peo- 
ple so  that  they  might  be  competent  to  proceed  with  the 
vocations  which  this  new  capital  would  provide,  the  new 
schoolhouses  that  could  be  erected  and  the  instruction 
diffused. 

The  causes  leading  to  public  expenditure  are  more 
pressing  in  the  modern  than  they  were  in  the  ancient  or 
mediaeval  eras.  The  cost  of  war  is  greater,  notwithstand- 
ing the  greater  ease  of  communication  by  land  and  sea. 
The  efforts  to  promote  national  enterprise,  comfort,  and 
health  lead  to  more  exacting  demands  in  the  nature  of 
public  improvements  or  public  works,  and  the  constant 
accretion  of  expenditures  which  overlap  the  provisions  of 
budgets  and  legislative  appropriations  creates  a  floating 
debt  which  in  time  must  be  "  funded  "  or  made  part  of 
the  "  permanent  "  debt  of  the  nation. 

The  greatest  care  must  be  observed  in  the  appropria- 
tions of  money  for  public  purposes,  because  of  the  possi- 
bility that  there  may  be  a  fluctuation  in  the  revenues  col- 
lected. This  fluctuation  may  represent  the  collection  of  a 
larger  amount  than  was  anticipated,  or  a  much  smaller 


PUBLIC  CREDIT  71 

one.  If  a  larger  amount  be  collected,  it  means  that  a 
surplus  will  be  created,  with  all  the  danger  that  this  sur- 
plus will  lead  to  prodigality  and  reckless  legislation.  If, 
however,  there  should  be  a  deficit,  it  means  that  unless 
the  government  has  ample  funds  in  its  treasury  to  cover 
it,  money  must  be  borrowed  for  that  purpose;  and  when 
a  government  has  to  borrow  money  for  normal  expendi- 
tures, it  indicates  that  it  is  living  beyond  its  means,  and  an 
impairment  of  its  credit  is  the  consequence.  At  the  close 
of  the  fiscal  year,  ending  June  30,  1905,  our  Government 
had  a  deficit  of  $24,000,000 ;  but  this  amount  was  easily 
replaceable  from  its  general  fund,  and  the  fact  that  the 
deficit  had  been  anticipated  for  almost  a  year,  discounted 
any  unfavorable  comment  its  appearance  would  possibly 
suggest. 

The  theory  has  been  advanced  that  great  public  debts 
are  a  healthy  sign  and  denote  that  the  nations  owing 
them  must  be  very  active  forces  in  the  world's  affairs,  and 
further,  that  they  must  be  in  high  credit;  to  be  able  to 
create  large  debts  presupposes  good  credit.  This  theory 
has  been  very  determinedly  attacked  from  some  influen- 
tial sources  that  have  not  hesitated  to  apply  to  it  severe 
criticisms.  A  large  public  debt  means  a  correspondingly 
large  interest  payment,  which  must  be  derived  from 
taxation. 

There  is  not  the  slightest  doubt  that  the  ability  to 
create  large  public  debts  leads  a  nation  into  extravagance. 
If  the  people  are  uncomplaining,  and  money  can  be  bor- 
rowed easily,  those  who  have  charge  of  the  question  of 
appropriations  will  not  exercise  the  same  prudence  as 
they  would  if  held  to  strict  accountability.  Economists 
also  demur  at  the  creation  of  great  public  debts,  for  the 


72  CREDIT  AND  ITS  USES 

plausible  reaaon  that  funda  which  a  govermnent  absorbs 
for  its  own  purposes  are  withdrawn  from  other  fields 
where  they  might  be  utilized  in  promoting  the  productive 
arts.  The  damage  incident  to  this  condition  is  apparent  in 
the  repression  of  productive  capacity.  The  interest  of  the 
people  is  withdrawn  from  this  essentially  necessary  course 
of  human  action,  and  indifference  to  the  strict  require- 
ments of  economic  design  makes  itself  felt  It  is  obvious 
that  a  people  schooled  in  the  methods  of  productive  capac- 
ity will  be  more  industrious  and  saving,  and  become  more 
independent  of  foreign  help  than  a  people  that  does  not 
possess  these  traits.  Hence  every  influence  that  tends  to 
unduly  divert  capital  from  the  commercial  betterment  and 
progress  of  the  nation  is  to  be  deplored ;  to  minimize  this 
evil  is  the  duty,  and  should  be  the  special  pride,  of  ad- 
vanced statesmanship. 

Having  considered  some  of  the  shadows  of  the  picture, 
it  is  in  order  to  contemplate  its  lights.  The  necessity  of 
maintaining  a  high  credit,  which  every  great  nation  must 
regard  as  one  of  its  cardinal  obligations,  has  the  effect 
of  imbuing  the  people  with  a  deep  sense  of  the  responsi- 
bility imposed  upon  them  both  individually  and  collect- 
ively. A  people  that  has  the  proper  respect  for  its  own 
position  among  the  family  of  nations  will  endeavor  in 
every  possible  way  to  assist  the  ruling  powers  in  so  dis- 
posing the  capacities  and  wealth  of  the  nation  as  to  make 
them  coimt  to  the  greatest  advantage  in  establishing  and 
maintaining  the  nation's  credit.  The  consequence  of  these 
sentiments  is  a  spirit  of  pride  in  the  national  growth  and 
position  which  cannot  fail  to  produce  an  exaltation  of 
national  feeling  and  patriotism,  all  of  which — providing 
it  does  not  descend  to  Chauvinism — ^makes  for  national 


PUBLIC  CREDIT  73 

progress.  Again,  it  may  be  claimed,  and  with  excellent 
warrant,  that  a  people  so  imbued  will  accommodate  itself 
to  the  necessities  of  the  government,  and,  if  necessary,  will 
practice  such  economy  and  self-restraint,  even  in  personal 
affairs,  as  will  leave  the  largest  possible  measure  of 
material  and  financial  substance  to  be  devoted  to  the  pur- 
poses of  the  government,  particularly  in  times  of  great 
national  peril  and  trial.  A  splendid  example  of  this 
phase  of  national  life  has  been  shown  in  the  attitude  of 
the  Japanese  people,  who  have  not  only  established,  but 
succeeded  in  maintaining,  under  conditions  which  most 
authorities  were  at  first  inclined  to  regard  as  discourag- 
ing, a  public  credit  which  is  one  of  the  marvels  of  latter- 
day  history. 

There  are  two  methods  by  which  a  nation  can  exercise 
its  credit:  one  by  the  sale  of  its  bonds  and  the  other  by 
the  issuance  of  its  paper,  redeemable  and  irredeemable. 
The  bonds  of  certain  governments  have  come  to  be  re- 
garded as  one  of  the  highest  and  safest  forms  of  invest- 
ment. They  may  or  may  not  have  any  security  behind 
them.  Bonds  which  sell  at  advantageous  rates,  unpro- 
tected by  any  collateral  agreements,  indicate  the  advanced 
state  of  public  credit  the  disposing  nation  enjoys.  A 
favorite  method  of  guaranteeing  government  bonds  is  by 
pledging  certain  revenues,  such  as  imports  and  other 
taxes,  as  security  for  their  liquidation.  As  an  example 
of  this  character  of  bond  may  be  mentioned  an  issue  of 
the  Japanese  Government  (July  8,  1905)  of  which  the 
following  is  an  abbreviated  description: 


74  CREDIT  AND  ITS  USES 

£30,000,000 

IMPERIAL    JAPANESE    GOVERNMENT    FOUR-AND- 

A-HALF-PER-CENT   STERLING  LOAN, 

(Second  Series) 
Due  July  10,  1925. 
With  Option  To  The  Imperial  Japanese  Government  To  Redeem 
All  or  Any  Part    On  or  After  July  10,  1910,  Upon  Giving  Six 
Months'  Notice. 

Secured  by  a  Charge  on  the  Tobacco  Monopoly  Revenues 
OF  the  Empire,  as  Stated  Below. 


Created  Under  the  Authority  of  Imperial  Ordinances  Numbers 
194  and  195  of  His  Majesty  the  Emperor,  Both  Promul- 
gated July  8,  1905. 


Coupon-Bearer  Bonds  in  the  Denominations  op  £20,  £100, 

AND    £200. 


Semiannual  Interest  Payable  January  10th  and  July  10th,  at 
the  Office  of  the  Yokohama  Specie  Bank,  Ltd.,  in  London,  at  its 
Agency  in  New  York,  and  Through  the  Deutsch-Asiatische  Bank, 
Berlin.  

Principal  and  Interest  Payable  in  London  in  Sterling,  in  New 
York  in  United  States  Gold  Dollars  at  the  Fixed  Exchange  of  $4.87 
per  Pound  Sterling,  and  in  Germany  in  Reichsmarks  at  the  Fixed 
Exchange  of  Mks.  20.45  per  Pound  Sterling. 


The  London  Issuing  Banks  Make  the  Following  Statements  in 
Their  Prospectus  Which  Has  Been  Approved  by  Korekiyo  Taka- 
hashi,  Esq.,  Vice-Go vernor  of  the  Bank  of  Japan,  the  Duly  Author- 
ized Special  Financial  Commissioner  of  the  Imperial  Japanese 
Government : 

"This  loan  is  repayable  at  par,  July  10,  1925,  but  the  Imperial 
Japanese  Government  reserves  the  right  to  redeem  at  par  all  or 
any  of  the  bonds  on  or  at  any  time  after  July  10,  1910,  on  giving 


PUBLIC  CREDIT  75 

six  months'  previous  notice.  Partial  redemption  to  be  effected 
by  drawings,  in  the  usual  manner,  at  the  office  of  the  Yokohama 
Specie  Bank,  Ltd.,  London,  and  the  New  York  Agency  of  the  same 
bank,  and  in  Germany  at  such  agency  or  agencies  as  the  Yokohama 
Specie  Bank,  Ltd.,  shall  determine  under  the  instructions  of  the 
Imperial  Japanese  Government.  The  loan  is  secured  both  as  to 
principal  and  interest  by  a  charge,  hmited  to  £30,000,000  and  the 
interest  thereon,  upon  the  annual  net  revenues  of  the  Imperial 
Japanese  Government  Tobacco  Monopoly  and  subject  only  to  the 
charge  in  favor  of  the  prior  Loan  of  £30,000,000.  The  Imperial 
Japanese  Government  has  the  exclusive  right  to  control  the  cultiva- 
tion and  production  of  the  leaf,  and  to  purchase,  import,  manu- 
facture, and  sell  tobacco.  It  thus  possesses  the  entire  monopoly 
of  the  tobacco  trade  within  the  limits  of  the  Japanese  Empire. 
The  estimated  net  revenue  for  the  fiscal  year  1905-06  from 
this  source  is  32,011,072  yen,  which  at  the  exchange  of  two 
shillings  and  half-penny  per  yen  is  equal  to  £3,267,796.  18s. 
8d.    The  actual  receipts  for  the  first  quarter  have  proved 

VERY   satisfactory." 

The  notice  of  which  the  foregoing  is  an  excerpt  was 
advertised  in  the  l^ew  York  papers  under  date  of  July 
11,  1905.  Two  days  afterwards  a  news  item  in  one  of  the 
leading  metropolitan  papers  announced  that  the  loan  had 
been  largely  oversubscribed.  This  shows  the  value  of  good 
credit. 

While  it  is  the  custom  among  certain  nations  to  in- 
dicate a  payable  date  for  bonds  issued  by  them,  it  is 
generally  understood  that  such  securities  will  run  in- 
definitely. This  is  not  a  disadvantage  but  an  advantage 
to  investors,  for  it  enables  them  to  make  investments  with 
a  reasonable  certainty  that  they  will  not  feel  called  upon 
to  disturb  them ;  they  can  look  forward  to  a  continuous 
and  steady  income,  and  they  also  have  the  advantage  that 
will  come  to  them  from  any  advancement  in  the  value  of 


76  CREDIT  AND  ITS  USES 

the  securities.  As  long  as  the  credit  of  the  issuing  nation 
remains  sound,  all  the  attributes  mentioned  are  brought 
into  play. 

The  second  method  to  which  reference  was  made  was 
the  issuance  of  paper,  or  the  recourse  to  paper  credit. 
The  acceptance  of  the  paper  issues  of  a  government  with 
freedom  and  confidence  indicates  also  a  state  of  high 
credit,  but  it  must  be  regretfully  acknowledged  that  in 
no  other  form  has  "  credit  "  been  more  persistently  or 
violently  abused  than  in  the  paper  issues  of  different 
national  and  state  governments.  In  this  treatise  it  is 
possible  to  give  this  question  only  passing  attention,  but 
enough  may  be  said  to  indicate  the  evils  that  have  crept 
into  and  out  of  the  system. 

The  difference  must  be  noted  between  paper  money 
secured  by  coin  deposits,  government  bonds,  or  otherwise, 
and  paper  money  which  is  simply  put  forward  with  either 
no  promise  as  to  its  future  payment,  no  interest-bearing 
covenant,  or  with  such  a  character  of  promise  as  contains 
no  substantial  prospect  of  fulfillment.  There  is,  or  has 
been,  quite  a  numerous  body  of  our  own  citizenship  who 
have  held  to  the  theory  that  anything  in  the  form  of  paper 
issued  by  the  Government  is  money,  and  good  money. 
The  basis  of  their  belief  (or  heresy)  is  that  the  fiat,  the 
dictum,  the  declaration  of  the  Government  gives  to  either 
paper  or  coin  the  value  represented  in  the  special  denomi- 
nation this  paper  or  coin  bears;  and  not  even  the  try- 
ing and  instructive  experiences  of  1893-96,  when  the  im- 
possibility of  maintaining  the  credit  of  the  Government 
and  the  credit  of  silver  without  recourse  to  humiliating 
expedients  was  fully  demonstrated,  has  convinced  them 
of  the  errors  of  their  views. 


PUBLIC  CREDIT  77 

Fiat  money  is  described  as: 

"Inconvertible  pai>er  money,  not  even  containing  a  promise  to 
pay,  but  issued  by  the  state  with  the  bare  assertion  of  its  identity 
with  true  money,  although  no  provision  is  made  for  its  exchange 
for  specie.  .  .  .  When  a  government  is  forced  to  this  measure,  the 
state  of  its  finances  is  virtually  bankruptcy.  The  name  '  fiat  money ' 
was  first  given  to  irredeemable  paper  currency  during  the  so-called 
Greenback  agitation  in  the  United  States  after  the  Civil  War, 
from  the  claim  of  the  Greenback  party  that  the  fiat  of  the  Govern- 
ment could  itself  give  value  to  a  circulating  medium." 

Public  credit  can  never  be  effectively  maintained  or 
promoted  by  any  such  system  of  paper  currency.  The  in- 
terests of  such  credit  require  that  every  output  of  the 
Government  should  be  so  protected  as  to  insure  its  liquida- 
tion, or  that  the  quantity  of  such  issues  should  be  in  pro- 
portion to  the  possibilities  of  honorable  liquidation.  The 
greenbacks  issued  by  the  Union  at  the  time  of  the  Civi^ 
War  have  for  years  been  a  source  of  great  solicitude  to 
those  who  have  the  credit  of  the  nation  at  heart,  and  they 
were  one  of  the  causes  of  the  financial  troubles  of  the  Gov- 
ernment during  the  panic  of  1893.  That  public  credit 
depends  on  confidence  to  an  unlimited  extent  may  be 
illustrated  by  one  of  the  phases  of  that  panic,  which  for- 
mer President  Grover  Cleveland  has  referred  to  in  his 
essay  on  "  The  Bond  Issues  "  in  the  "  Presidential  Prob- 
lems."    It  is  this: 

"  Another  most  important  condition  of  mind  among  the  people, 
however,  grew  out  of,  or  at  least  accompanied,  their  acceptance  of 
the  redemptive  sufficiency  of  the  gold  reserve  as  constituted.  The 
popular  belief  became  deep-seated  and  apparently  immovable  that 
the  reduction  of  the  gold  reserve  to  an  amount  less  than  $100,000,000 
would,  in  some  way,  cause  a  disastrous  situation,  and  perhaps  justify 
an  apprehension  concerning  our  nation's  financial  soimdness.    Tlius 


78  CREDIT  AND  ITS  USES 

a  gold  reserve  containing  at  all  times  $100,000,000  came  to  be  re- 
garded by  the  people  with  a  sort  of  sentimental  solicitude,  which, 
whatever  else  may  be  said  of  it,  was  certainly  something  to  be 
reckoned  with  in  making  our  national  financial  calculations." 

Reference  has  been  frequently  made  to  the  sensitive- 
ness of  credit,  and  the  foregoing  passage  from  the  pen 
of  My.  Cleveland  exemplifies  the  great  delicacy  of  the 
credit  system.  As  he  shows,  the  fear  and  distrust  of  the 
people  was  due  not  so  much  to  their  understanding  of 
the  exact  amount  that  would  be  requisite  to  protect  the 
credit  of  the  Government,  as  to  the  fact  that  the  arbitrary 
and  probably  unscientific  figure  established  by  Congress 
had  been  subject  to  an  impairment.  That  this  figure  of 
$100,000,000  did  not  set  any  absolute  mark  of  safety  is 
shown  by  the  fact  that  subsequent  legislation  by  Congress 
placed  the  figure  below  which  the  reserve  should  not  be 
permitted  to  go,  hereafter,  at  $150,000,000. 

Public  credit  necessarily  refers  to  the  credit  used  by 
all  political  divisions  and  therefore  covers  the  credit  of 
States  and  their  subdivisions,  such  as  counties,  cities, 
townships,  villages,  etc.  Professor  Bryce  introduces  bis 
remarks  on  "  State  Finance,"  in  the  "  American  Common- 
W'Calth,"  with  these  words: 

"The  financial  systems  in  force  in  the  several  States  furnish 
one  of  the  widest  and  most  instructive  fields  of  study  that  the 
whole  range  of  American  institutions  presents  to  a  practical  states- 
man, as  well  as  to  a  student  of  comparative  politics." 

The  diversity  of  interests,  agricultural,  mining,  manu- 
facturing, and  commercial,  represented  in  the  States  im- 
poses just  as  iraportant  considerations  for  the  judgment 
of  the  statesman  as  do  those  of  the  federal  Government. 


PUBLIC  CREDIT  79 

The  fact  that  in  all  matters  of  strictly  local  concern  the 
State  has  a  free  hand  under  the  federal  compact,  makes 
the  duty  of  each  in  advancing  its  own  interests  and  main- 
taining its  credit  just  as  primal  a  necessity  as  if  each 
State  were  an  entirely  independent  principality  and  ac- 
countable to  no  one.  The  credit  of  the  States  has  been 
subject  to  the  same  curses  that  have  crept  into  other  polit- 
ical organisms,  and  in  some  cases  these  abuses  have  taken 
the  form  of  outright  repudiation  of  obligations,  from 
which  the  creditor  is  without  relief.  The  national  Gov- 
ernment is  a  sovereign  one ;  and  in  all  matters  where  the 
Constitution  does  not  define  certain  rights  and  duties  as 
belonging  exclusively  to  the  federal  Government  the  sov- 
ereignty of  the  States  has  not  been  impaired.  This  role 
of  sovereignty  carries  with  it  an  element  of  danger  to  those 
who  purchase  the  obligations  of  a  nation  or  state  so  con- 
ditioned, for  it  means  that  they  may  be  at  any  time 
repudiated.  Venezuela  has  obligated  itself  to  pay  certain 
sums  to  England,  France,  Germany,  and  Italy,  and  the 
customs  receipts  have  been  mortgaged  as  security  for  the 
payment  of  the  amounts  awarded  by  the  Hague  Tribunal. 
But  a  war  between  many  nations  might  bring  about  a 
condition  of  affairs  whereby  the  effects  of  this  decision 
would  be  entirely  upset.  Treaties  between  nations  are 
binding  until  they  are  broken.  Where  a  nation  forces  an- 
other to  do  certain  things,  it  is  usually  because  of  her 
superior  strength,  or  because  she  has  made  it  to  the  inter- 
est of  the  country  with  whom  she  is  treating  to  do  these 
things.  It  is  either  force  or  cupidity,  and  very  seldom 
moral  suasion,  by  which  agTeements  between  nations  are 
effected.  It  is  not  a  sense  of  legal  obligation  that  impels 
such  agTeements.     A  sovereign  state  or  nation  is  the  sole 


80  CREDIT  AND  ITS  USES 

judge  of  -vvhat  she  will  do  or  will  not  do.  Enough  has  there- 
fore been  said  to  show  the  desirability  of  high  credit  on  the 
part  of  nations  and  states,  and  one  leading  element  of 
that  credit  will  be  the  faith  that  the  community  reposes 
in  the  fulfillment  of  obligations.  A  state  which  has  re- 
pudiated her  guarantees  at  any  period  will  hardly  have  as 
good  credit  as  one  that  has  always  respected  those  into 
which  she  has  entered. 

The  recital  of  the  foregoing  danger  signals  may  be 
regarded  as  superfluous,  but  they  are  fundamental  ques- 
tions for  consideration  under  the  head  of  public  credit. 
What  would  apply,  however,  to  State  securities  in  the 
matter  of  possible  repudiation  could  not  affect  municipal 
obligations;  for  municipalities  can  be  proceeded  against 
in  the  same  sense  that  individuals  may,  and  compelled  to 
respect  their  obligations.  The  propensity  to  extravagance 
on  the  part  of  municipalities  has  also  been  so  pronounced 
that  they  are  in  many  cases  prohibited  from  incurring 
obligations  in  the  shape  of  funded  indebtedness  in  excess 
of  a  certain  percentage  of  the  gross  valuation  of  all  the 
taxable  property  of  the  corporation.  This  percentage 
varies,  in  some  cases  being  ten  per  cent,  in  others  two  and 
a  half  per  cent  or  two  per  cent,  and  in  some  States  the 
cities  are  required  to  secure  the  sanction  of  the  Legislature 
for  any  expenditure  outside  of  regular  rimning  expenses. 
The  need  for  such  a  requirement  hardly  invites  explana- 
tion. Without  such  limitation  those  in  control  of  munici- 
palities and  other  subdivisions  of  the  State  would  enter 
upon  a  reign  of  prodigality  from  the  consequences  of 
which  the  local  government  could  not  escape.  This  would 
prove  not  only  a  great  burden  to  the  people,  but  ruinous 
to  the  credit  of  the  city.     Debts  which  were  the  result  of 


PUBLIC  CREDIT  81 

waste  and  extravagance  might  stand  for  many  years  in  the 
way  of  the  institution  of  reforms  and  improvements  which 
the  best  interests  of  the  people  would  sorely  demand. 
Many  State  and  municipal  securities  are  rated  among  the 
best  possible  investments,  and  the  low  rate  of  interest  at 
which  they  can  be  marketed  is  proof  of  the  excellent  credit 
of  the  issuers. 


CHAPTER    VI 

INDIVIDUAI.    OE    PEKSONAL    CREDIT 

The  most  popular  form  of  credit,  popular  in  the  ex- 
tent of  its  practice,  is  individual  or  personal  credit.  The 
title  "  individual "  has  been'  applied  to  this  branch  of 
credit  to  distinguish  it  from  the  credit  utilized  by  those 
who  act  as  distributors  of  merchandise.  The  latter  are 
undoubtedly  fulfilling  a  public  or  quasi-public  function, 
although  the  motives  leading  them  to  follow  their  differ- 
ent vocations  or  trades  are  purely  selfish  or  personal. 
They  are  endeavoring  to  acquire  a  sufficient  profit  from 
the  handling  of  the  goods  in  which  they  deal  to  support 
themselves  and  their  families,  and  if  possible  to  accumu- 
late a  competence  for  use  in  old  age.  In  the  case  of  the 
individual  or  consumer  the  credit  he  secures  is  solely  for 
personal  reasons  and  uses.  It  brings  to  him  those  things 
he  finds  it  necessary  to  possess  for  the  purpose  of  sustain- 
ing life,  clothing  himself,  and  equipping  his  home  with 
suitable  comforts  and  adormnents,  of  cultivating  useful 
knowledge,  and  providing  for  his  pleasures.  All  this  has 
an  exclusively  personal  function,  or  one  for  individual 
activities  only,  and  thus  it  is  alluded  to  and  understood 
as  "  individual  or  personal  credit." 

Mr.  Macleod  defines  "  personal  credit "  as  "  a  per- 
son's purchasing  power  over  and  above  his  money:  hence, 
82 


INDIVIDUAL  OR  PERSONAL  CREDIT  83 

credit  is  a  resource  and  wealth  cumulative  to  money." 
This  refers  more  generally  to  the  broad  use  of  the  indi- 
vidual's power  and  ability  to  exercise  his  credit  in  bank- 
ing and  commercial  circles  than  in  the  direction  to  which 
a  discussion  of  "  individual  or  personal "  credit  tends, 
in  its  commonly  accepted  interpretation. 

In  order  to  further  differentiate  "  individual  credit " 
from  the  exercise  of  personal  power  or  ability  to  control 
"  credit "  on  the  broader  lines  indicated,  it  is  sometimes 
entitled  "  Consumptive  Credit,"  on  the  theory  that  indi- 
vidual, strictly  personal,  or  consumptive  credit  covers 
those  phases  of  credit  which  spend  themselves  in  the  con- 
sumption or  annihilation  of  necessities  and  articles  of 
luxury  as  opposed  to  those  utilities  of  credit  which  assume 
a  productive  or  distributive  character. 

Individual  or  personal  credit  can  be  said  to  be  the 
basest  form  of  credit,  in  that  it  depends  less  upon  a 
capitalistic  or  collateral  basis  than  any  other  branch  of 
credit.  At  the  same  time,  as  the  earliest  form  of  credit, 
it  was  the  foundation  of  all  the  other  divisions  of  credit. 
The  theory  of  credit,  and  following  that  the  system  of 
credit,  rose  from  the  institution  of  personal  credit.  The 
latter  is  therefore  of  the  most  primitive  origin,  and  is  a 
product  of  certain  natural  influences,  which,  in  turn,  gen- 
erated trust  among  the  people  as  to  the  honest  perform- 
ance of  engagements  entered  into,  and  the  safe  return  of 
any  property  lent,  either  in  its  original  or  equivalent  form 
as  the  contract  might  provide. 

One  of  the  best  practical  treatises  on  individual  credit 
which  has  been  written  is  that  entitled  "  Individual  Cred- 
its," by  James  G.  Cannon,  vice-president  of  the  Fourth 
National  Bank  of  New  York.     In  it  he  has  explained 


84  CREDIT  AND  ITS  USES 

in  a  most  lucid  way  the  basis,  practice,  and  evils  of  this 
division  of  the  credit  family.  Mr.  Cannon  claims  that 
"  the  credit  structure  has  been  reared  upon  faith  and 
supposition  rather  than  upon  tangible  property  and  finan- 
cial strength,"  As  a  criticism  of  the  looseness  with  which 
the  question  of  credit  has  been  treated,  the  opinion  is  jus- 
tified. It  should  not,  however,  be  interpreted  as  a  vindi- 
cation of  the  idea  that  goods,  and  goods  only,  can  be 
scientifically  considered  the  basis  of  credit;  for  no  writer 
among  either  professionals  or  laymen  has  done  more  to 
give  to  character  and  capacity,  as  personal  elements,  a 
more  commanding  place  in  the  "  dynamics  of  credit  "  than 
the  able  authority  referred  to.  It  is  a  timely  warning  that 
individual,  and  all  other  branches  of  credit,  should  be 
reduced  to  a  systematic  basis ;  and  that  the  better  defined 
the  system,  the  safer  will  be  the  credit  dispensed,  especially 
in  its  influence  upon  the  business  morals  of  the  people. 
The  duty,  therefore,  which  imposes  itself  upon  business 
men  is  to  "  build  a  better  basis  for  individual  credits," 
in  order  that  "  the  whole  commercial  edifice  ...  be 
strengthened  with  benefit  to  all  concerned." 
Mr.  Cannon  says  further: 

"The  evils  from  which  the  mercantile  community  suffers  seem 
...  to  be  due,  not  so  much  to  lack  of  money  or  capital,  as  to  the 
lack  of  an  intelligent  and  proper  use  of  credit.  If  we  can  inspire 
a  healthy  public  sentiment  in  regard  to  all  forms  of  credit,  it  will 
serve  greatly  to  facilitate  needed  reforms." 

The  elements  of  individual  credit  cannot  be  said  to 
differ  materially  from  those  of  the  other  divisions  of 
credit.  While  the  elements  should  be  and  in  some  cases 
are  the  same  as  in  commercial  credit,  the  fact  is  that  in 


INDIVIDUAL  OR  PERSONAL  CREDIT  85 

a  great  mass  of  the  individual  credit  practiced,  some  of 
these  elements  are  wholly  lacking.  The  nature  of  the 
economic  and  social  position  of  the  person  is  such  that 
he  cannot  be  expected  to  develop  all  these  elements.  In 
individual  credit  there  is  less  system  followed  than  in  the 
other  branches.  The  stronger  the  character,  the  earning 
power,  and  wealth  of  the  applicant  for  credit,  the  safer 
the  risk  and  the  greater  the  freedom  with  which  credit 
may  be  extended. 

This  credit  is  extended  to  a  vast  number  of  people. 
The  task  of  classifying  them  is  a  most  onerous  one.  Their 
earning  power  is  a  question  of  the  widest  possible  variance, 
as  is  also  the  nature  of  their  family  responsibilities  and 
demands.  The  mercantile  agencies  can  with  reasonable 
correctness  classify  all  dealers,  manufacturers,  wholesalers, 
jobbers,  commission  men,  and  retailers  under  a  brief 
table  of  cleverly  devised  classifications  or  ratings,  indi- 
cating character,  worth,  and  paying  qualities;  but  the 
attempt  to  accomplish  such  a  result  in  connection  with  the 
armies  of  labor  and  professional  life  would  be  an  under- 
taking requiring  long  years  of  patient  and  unrequited 
service,  leaving  aside  the  tremendous  financial  outlay  it 
would  involve.  Further,  there  is  the  almost  insurmount- 
able difficulty  of  holding  those  who  dispense  this  credit 
to  any  code  or  set  of  rules ;  and  this  difficulty  arises  from 
the  economic  status  of  the  credit  seekers  as  well  as  from 
the  number  concerned.  Here  you  have  a  great  aggrega- 
tion of  credit  dispensers,  treating  with  all  sorts  and  con- 
ditions of  men,  subject  to  all  known  phases  of  social  and 
political  advantage  and  disadvantage — the  first  demanding 
on  their  merits;  the  second  commanding,  from  the  very 
fact  of  their  poverty  and  misery,  such  a  share  of  the 


86  CREDIT   AND   ITS   USES 

materials  for  sustaining  and  improving  life  as  their  spe- 
cial wants  and  desires  will  suggest.  Mr.  Cannon,  in  the 
paper  mentioned,  inclined  to  the  opinion,  from  which 
there  will  be  no  dissent,  that  one  of  the  evils  of  the  credit 
system,  and  particularly  in  individual  credits,  is  the  "  too 
great  liberality  "  in  extending  credit.  This  liberality  is 
not  due  to  any  spirit  of  generosity  or  philanthropy,  but  is 
the  outcome  of  failure  on  the  part  of  those  who  extend 
credit  to  properly  investigate  and  satisfy  themselves  as 
to  the  credit  standing  and  desirability  of  the  applicant. 
Very  great  advances  have  been  made  in  the  methods  em- 
ployed for  making  investigations  and  the  means  thereto 
have  been  greatly  extended.  This  refers  to  all  branches 
of  credit;  and  while  the  omission  to  engage  in  such  in- 
vestigations may  have  been  noticeably  frequent  in  indi- 
vidual credits,  there  is  no  division  in  w^hich  it  is  more 
manifest  than  in  banking  credit.  The  credit  department 
in  the  bank  is  the  work  of  the  past  ten  years,  barring  the 
days  of  those  who  blazed  the  way  for  its  institution,  and 
even  to-day  it  is  not  as  pronounced  a  feature  in  banking 
as  it  is  in  commercial  circles.  There  is  certainly  no  good 
reason  why  this  should  be  so,  for  the  volume  of  bank 
credits  would  seem  to  demand  every  care  that  could  reason- 
ably be  extended  to  it. 

The  failure  to  make  proper  investigations  in  individ- 
ual credits  may  be  traced  to  a  few  underlying  causes. 
(1)  The  cupidity  of  dealers  in  extending  credit  indis- 
criminately in  order  to  do  a  larger  business  than  their 
competitors.  (2)  The  fear  of  offending  patrons  by  ask- 
ing entirely  legitimate  questions  in  regard  to  their  means 
and  prospects,  and  thus  driving  trade  away.  (3)  The 
absence  of  sound  knowledge  on  the  part  of  dealers  in  re* 


INDIVIDUAL  OR  PERSONAL  CREDIT  87 

gard  to  the  necessity  of  trusting  their  goods  to  those  only 
who  are  so  circumstanced  as  to  relatively  insure  payment 
being  made  for  them.  (4)  The  lack  of  facilities  among 
the  great  mass  of  dealers  for  making  such  investigations 
as  are  necessary. 

A  brief  discussion  of  the  foregoing  reasons  is  in  order. 
(1)  The  desire  to  overreach  one's  neighbor  is  not  always 
due  to  abnormally  selfish  or  unworthy  motives.  At  the 
same  time  in  the  struggles  of  competition  it  should  be 
borne  in  mind  that  unless  the  business  done  be  a  safe 
business,  the  results  are  bound  to  prove  disastrous.  A 
small  business,  with  good  collections  and  fair  profits,  is 
always  safer  in  the  end  than  a  big  business  built  upon 
unwise  credits ;  for  the  latter  not  only  invites  commercial 
failure,  but  the  mental  and  physical  strain  upon  the 
dealer  is  a  detriment  to  him  both  in  a  personal  and 
business  sense.  (2)  It  is  well  known  that  consumers  take 
advantage  of  the  dealer's  fear  of  the  effect  upon  a  cus- 
tomer's attitude  because  of  questions  regarding  ability 
to  make  payment,  and  there  are  many  who  trade  upon 
this  very  fear  and  defraud  their  creditors  accordingly. 
A  good  presence,  a  bold  manner,  and  an  assertive  method 
of  expression  have  a  powerful  effect  upon  the  mind  of 
the  local  tradesman,  and  he  gives  credit  without  reliable 
knowledge  as  to  whether  or  not  his  bills  will  ever  be  paid. 
Even  when  tardiness  in  payment  may  cause  misgivings, 
he  hesitates  to  offend  that  important  personage,  his  cus- 
tomer, for  fear  his  competitor  will  take  the  trade  away. 
(3)  The  absence  of  knowledge  on  the  part  of  dealers  of 
the  duty  they  owe  themselves  in  making  investigations 
of  their  customers'  standing.  This  is  a  general  condition 
and  one  attributable  to  lack  of  educational  methods  on  the 


88  CREDIT  AND  ITS  USES 

part  of  those  who  dispense  banking  and  commercial  credit 
The  latter  should  make  it  plain  to  the  retailer  that  he 
ought,  for  his  own  safety  (and  his  safety  means  the  safety 
of  the  banker  and  wholesaler),  to  satisfy  himself  that 
those  to  whom  he  is  giving  credit  are  worthy  of  it.  The 
retailer's  ability  to  pay  the  wholesaler  or  jobber,  or  to 
pay'  his  banker  for  a  loan,  depends  on  whether  he  can  col- 
lect his  own  accounts  promptly  and  fully.  If  he  cannot 
pay  his  creditor,  the  latter  in  turn  cannot  pay  his,  whether 
he  be  banker  or  manufacturer;  and  the  falsity  and  un- 
soundness of  individual  credit  and  the  losses  attending 
it  are  reflected  through  the  whole  commercial  structure 
with  results  that  make  for  financial  disaster.  (4)  The 
department  stores  and  large  retail  establishments  usually 
have  employees  whose  duty  it  is  to  make  necessary  credit 
investigations.  In  addition  to  their  own  independent  in- 
quiries, they  can  avail  themselves  of  the  services  of  the 
mercantile  agencies  and  other  sources  of  credit  informa- 
tion, such  as  retail  mercantile  agencies  and  cooperative 
agencies  which  they  themselves  maintain,  and  to  which 
they  in  turn  contribute  such  information  as  they  may 
possess  in  regard  to  a  customer  when  called  upon  to  do  so. 
The  majority  of  dealers  are  without  these  facilities.  They 
cannot  afford  to  employ  people  for  this  purpose;  nor  to 
subscribe  to  the  mercantile  agencies,  neither  can  they 
afford  to  belong  to  the  cooperative  bureaus.  While  the 
owner  of  the  business  might  appreciate  the  necessity  of 
making  proper  investigations,  he  cannot  afford  to  give 
such  work  the  necessary  time.  In  a  small  business  the 
element  of  time  is  a  very  important  one,  and  has  to  be 
figured  in  dollars  more  frequently  than  in  a  large  estab- 
lishment where  the  volume  of  profits  justifies  a  more 


INDIVIDUAL  OR  PERSONAL  CREDIT  89 

painstaking  care  for  every  business  detail.  Undoubtedly 
the  dealer  would  save  money  by  giving  the  question  of 
credit  standing  more  attention,  even  if  to  do  so  meant 
the  omission  of  other  duties. 

That  many  people  are  given  credit  when  they  have 
little  basis  for  it,  or  by  their  failure  to  make  prompt  pay- 
ment have  sacrificed  their  right  to  it,  is  a  matter  of 
common  knowledge.  That  it  is  not  an  easy  matter  to 
obtain  satisfactory  information  in  regard  to  people  who 
seek  individual  credit  is  a  fact  known  to  all  who  have 
had  practical  experience  in  credits.  This  difficulty  should 
lead  to  the  development  of  every  honorable  means  for  safe- 
guarding credit  extension  in  this  form,  and,  if  necessary, 
to  the  withholding  of  credit  until  satisfactory  advices  are 
secured.  On  the  other  hand,  there  are  many  people 
respecting  whom  it  is  possible  to  learn  very  little.  A 
man  on  a  plain  salary  offers  little  opportunity  for  ex- 
tended investigation,  and  the  opportunities  of  judging  of 
the  "  moral "  risk  involved  is  difiicult  from  the  fact  that 
little  Is  known  of  him ;  as  Mr.  Cannon  says : 

"  You  would  be  surprised  to  learn  that  some  of  the  richest  and 
most  substantial  houses  in  the  larger  cities  will  seek  for  data  through 
the  instrumentality  of  janitors  of  apartments,  butchers,  and  trades- 
people generally." 

Closely  related  to  the  subject  of  individual  credit  is 
the  question  of  the  effect  of  credit  on  prices.  The  latter 
determine  the  cost  of  living,  a  question  of  vital  importance 
to  those  who  depend  upon  their  earning  power,  as  it  is 
upon  the  consumer  that  the  final  and  full  effect  of  price 
changes  manifests  itself. 

In  a  reference  to  credit  as  a  creator  of  purchasing 


90  CREDIT  AND  ITS  USES 

power,  attention  was  called  to  the  view  of  Mr.  Mill  that 
"  credit,  in  short,  has  exactly  the  same  purchasing  power 
with  money,  and  as  money  tells  upon  prices  not  simply 
in  proportion  to  its  amount,  but  to  its  amount  multiplied 
by  the  number  of  times  it  changes  hands,  so  does  also 
credit,"  thus  having  an  effect  (and  an  appreciable  one) 
on  prices. 

Where,  as  in  our  country,  credit  is  resorted  to  by  the 
humblest,  and  is  in  universal  practice  by  the  smallest 
dealers,  there  must  be  some  compensatory  element  for 
the  interest  on  the  capital  represented  in  the  amounts 
trusted  out  by  them  and  which  they  thus  forfeit,  and  for 
the  losses  from  uncollectible  accounts.  This  loss  must  be 
an  enormous  one  when  viewed  in  the  aggregate.  As  ex- 
pressed by  Mr.  Daniel  B.  Murphy,  of  Rochester,  IsT.  Y., 
in  his  paper  on  "  The  Objects  and  Possibilities  of  Credit 
Men's  Associations  "  (April  17,  1900) : 

"The  entire  story  is  not  yet  told.  These  stupendous  figures  (an 
average  reported  loss  of  $178,871,026.70  for  ten  years,  1890-1899) 
- — appalling  though  they  be — do  not  include  the  untold  millions 
that  are  absolutely  lost  each  year,  by  merchants  engaged  in  retail 
trade,  in  every  line  of  industry,  in  every  town  and  crossroad,  from 
ocean  to  ocean,  from  the  lakes  to  the  Gulf,  comprising  every 
retail  enterprise,  from  the  gigantic  department  stores  in  our  great 
cities  to  the  humble  rural  dealers.  These  figures  do  not  include 
the  very  considerable  loss  sustained  by  those  engaged  in  the  learned 
professions — notably  by  the  physicians  of  the  country — nor  do  the)' 
include  the  enormous  losses  of  a  personal  and  confidential  nature, 
that  are  not  submitted  to  the  gaze  and  scrutiny  of  the  public." 

The  consumer  must  recompense  the  dealer  for  the  loss 
to  him  of  interest  on  capital  and  from  spurious  accounts; 
and  this  recompense  is  made  to  the  merchant  in  the  form 
of  an  advance  in  the  selling  price.     Further,  the  very 


INDIVIDUAL  OR   PERSONAL  CREDIT  91 

nature  of  credit  involving  a  deferrence  in  the  time  of  pay- 
ment, creates  in  ihe  consumer  an  inclination  to  gratify 
liis  wants  with  a  freedom  that  would  be  entirely  lacking 
if  cash  were  the  basis  of  his  dealing.  In  this  way  an 
extra,  and  it  might  be  said  an  excessive,  demand  for 
goods  is  created;  and  this  demand,  not  being  at  all  times 
and  in  all  lines  or  articles  easily  met  or  satisfied,  produces 
an  advance  in  prices.  This  advance  the  consumer  must 
pay,  and  in  most  instances  is  perfectly  willing  to  pay, 
for  the  reason  that  his  credit  enables  him  to  prepare  for 
the  due  date  of  payment,  and  he  will  discount  the  possi- 
bilities of  the  future  in  his  desire  to  possess  the  things 
of  the  present. 

Credit  is  sought  for  almost  every  want  and  desire  of 
man.  The  range  of  credit  functions  begins  with  the 
actual  necessaries  of  life  and  ends  with  the  rarest  forms 
of  luxury.  It  is  a  debatable  question  whether  those  who 
seek  credit  for  the  necessaries  of  life,  by  which  are  meant 
food  and  other  things  absolutely  required  to  preserve 
health  and  a  minimum  of  comfort,  are  not  more  harmed 
than  benefited  by  the  credit  they  secure.  In  this  class  may 
be  considered  laborers,  tradesmen,  and  mechanics  who  are 
working  for  wages  payable  weekly,  semimonthly,  or 
monthly.  With  the  amount  of  a  month's  wages  in  hand 
at  the  beginning  of  a  month,  a  well-behaved  husband  and 
prudent  wife,  held  to  cash  payments,  will  accommodate 
themselves  to  their  known  means ;  they  will  not  pay  a 
larger  sum  for  house  rent  than  their  income  warrants; 
they  will  not  indulge  in  luxuries  that  their  means  will 
not  justify,  but  will  endeavor  to  save  something,  be  it 
ever  so  little,  to  form  the  nucleus  of  a  fund  for  the  time 
when  the  man,  the  provider,  may  be  out  of  employment, 


92  CREDIT  AND  ITS  USES 

or  sickness  come  upon  them.  Reverse  the  picture  and 
put  them  on  a  credit  basis  and  the  gratification  of  their 
wants  not  being  restrained  by  the  necessity  of  parting 
with  the  cash  in  hand,  but  rather  stimulated  by  the 
thought  that  Mr.  So  and  So  will  wait  for  his  money  until 
pay  day,  the  desire  to  secure  some  other  boon  which 
reqilires  the  outlay  of  spot  cash  prevails,  and  the  thing  is 
done.  Mr.  So  and  So  does  not  get  his  money  on  time  and 
the  people  are  in  debt.  This  is  a  viBry  simple  word  pic- 
ture of  an  everyday  experience.  Can  it  be  avoided  ? 
Possibly  not  under  our  present  economic  system ;  but  any 
measures  of  restraint  which  will  curtail  the  evils  of  credit 
among  this  class  of  people,  evils  to  them  morally  and 
financially,  as  well  as  evils  to  the  dealer,  should  be  in- 
voked. One  effective  method  would  be  to  restrict  the 
amount  of  credit  to  be  allowed  in  a  week,  to  insist  upon 
payment  when  due  on  pain  of  a  withdrawal  of  credit,  and 
an  agreement  among  the  dealers  that  they  will  not  extend 
credit  to  anyone  who  has  been  rejected  on  the  grounds  men- 
tioned until  a  settlement  is  made.  The  so-called  black  list 
of  the  beef  trust,  as  far  as  it  referred  to  the  withdrawal 
of  credit  from  dealers  whose  imdesirability  was  based  on 
their  failure  to  pay  for  goods,  involved  a  necessary  busi- 
ness policy. 

There  is  one  form  of  organized  credit  extension  to 
workmen  that  should  be  mentioned,  and  that  is  the  credit 
given  through  the  so-called  company  stores  conducted  by 
large  industrial  and  mining  corporations.  These  stores 
are  conducted  with  the  idea  that  they  will  yield  a  profit, 
and  the  system  employed  as  to  charges  has  had  the  effect 
of  causing  great  dissatisfaction  among  the  employees.  It 
is  not  an  unusual  experience  that  with  the  small  wages 


INDIVIDUAL  OR  PERSONAL  CREDIl  93 

paid  in  many  callings,  at  the  end  of  the  month  or  at  the 
time  when  the  wages  are  due  it  is  discovered  that  the 
workman  has  nothing  coming  to  him,  as  the  credit  he  has 
"  enjoyed  "  at  the  company  stores  has  represented  all  and 
more  than  is  due  him.  In  this  way  workmen  are  kept 
continually  in  debt  to  the  company,  and  a  man  becomes 
more  like  a  serf  than  an  independent  workman.  The 
prices  charged  workmen  at  the  company  store  have  not 
infrequently  been  the  cause  of  disturbances  between  labor 
and  capital,  and  the  relation  of  individual  credit,  thus 
granted,  to  the  great  labor  problem  becomes  an  interesting 
study. 

There  is  another  very  numerous  class  which  is  con- 
stantly in  the  market  for  individual  credit.  This  class  is 
composed  of  public  officials,  lawyers,  doctors,  clergymen, 
educators,  teachers,  architects,  civil  engineers,  real-estate 
agents,  insurance  agents,  bank  clerks,  salesmen,  account- 
ants, bookkeepers,  etc.  With  these,  other  elements  enter 
into  the  constitution  of  the  credit  than  with  the  class 
recently  discussed.  These  elements  are  mainly  character 
and  earning  power  and  means  represented  in  personal  and 
real  property. 

Character  has  an  important  place  in  individual  credit 
as  well  as  in  the  other  primary  divisions.  A  man  of  good 
character  can  be  depended  upon  to  liquidate  his  indebted- 
ness if  it  be  possible  for  him  to  do  so,  although  continued 
sickness  or  the  loss  of  his  position  may  frequently  prevent 
his  living  up  to  his  engagements  as  to  time;  but  in  such 
a  case,  when  the  debtor  finds  himself  in  a  position  to  pay, 
be  will  do  so.  Further,  a  man  of  sound  character  can  be 
depended  upon  not  to  live  beyond  his  means  nor  to  engage 
in  dissolute  and  profligate  devices.     A  salesman,  in  the 


94  CREDIT  AND  ITS  USES 

receipt  of  a  good  steady  salary  and  possessing  the  element 
of  chanicter  as  it  Las  been  defined,  will  make  a  better 
credit  risk  than  a  person  who  is  depending  upon  a  small 
income  from  real  estate,  for  the  failure  of  a  mortgagee  to 
pay  his  interest  promptly  may  retard  the  payments  of 
such  a  person.  Many  lawyers,  doctors,  and  others  of  those 
enumerated  above  are,  as  far  as  their  earning  capacity  is 
concerned,  better  credit  risks  than  small  merchants ;  for 
their  incomes  are  large  and  the  very  nature  of  their  pro- 
fessions, being  of  a  semipublic  character,  is  an  incentive 
to  them  to  stand  well  in  the  community,  and  by  this  is 
meant  to  be  in  good  credit.  A  thing  to  be  remembered, 
however,  in  connection  with  professional  men,  insurance 
agents,  and  others  of  similar  callings  is  the  propensity 
to  extravagance.  Insurance  men  and  salesmen,  those  of 
the  higher  grades,  are  compelled  to  do  considerable  "  en- 
tertaining "  as  a  means  of  acquiring  and  holding  "  busi- 
ness " ;  and  this  undoubtedly  leads  men  into  extravagant 
methods  and  high  living.  A  man's  taste  for  dress,  pleas- 
ure, and  his  associations  are  all  questions  which  have  a 
very  decided  bearing  upon  his  credit  acceptability,  and 
they  should  be  carefully  examined  and  passed  upon  before 
an  account  is  accepted,  and  also  looked  into  periodically 
during  the  continuance  of  such  an  account.  Another  point 
to  be  considered  is  the  propriety  of  a  purchase.  Is  there 
■warrant  for  it?  Is  the  person  likely  to  require  the  char- 
acter and  quantity  of  goods  selected  ?  As  Mr.  Cannon 
has  said : 

"For  instance,  where  a  customer  might,  without  criticism,  buy 
a  $500  house-furnishing  goods  bill,  he  might  very  properly  be 
refused  a  credit  of  $300  for  purchases  made  in  the  dress-goods 
department." 


INDIVIDUAL  OR  PERSONAL  CREDIT  95 

From  all  that  has  been  said,  it  is  apparent  that  the 
evils  that  have  affected  individual  credit  are  chargeable, 
quite  as  much  to  dealers  themselves  as  to  the  remissness 
of  those  to  whom  the  credit  is  extended.  Enough  has  al- 
ready been  adduced  to  show  the  general  defects  of  the  sys- 
tem ;  but  there  is  one  custom  which  has  tended  to  generate 
abuses  on  all  sides,  and  that  is  the  failure  of  both  large 
and  small  dealers  to  insist  upon  prompt  settlements,  or, 
as  a  penalty,  the  withdrawal  of  credit  favors.  That  a 
great  improvement  has  taken  place  in  this  respect  during 
the  past  ten  years  is  to  be  admitted  and  applauded.  As 
far  as  the  New  York  market  is  concerned,  the  credit  for 
this  improvement  must  be  accorded  to  a  man  who,  some 
ten  years  ago,  accepted  the  position  of  credit  man  in  a 
leading  retail  establishment.  He  came  to  the  conclusion 
that  one  of  the  principal  reasons  for  the  backwardness  of 
people  in  the  settlement  of  their  accounts  was  the  long 
time  to  which  customers  felt  they  were  entitled.  This 
man,  who  had  thoroughly  educated  himself  in  all  the  in- 
tricacies of  commercial  credit  in  its  widest  sense,  proposed 
to  his  firm  that  an  innovation  should  be  introduced  in 
the  form  of  bills  mailed  promptly  on  the  first  of  every 
month,  and  that  it  be  specified  upon  the  invoices  that 
monthly  settlements  were  expected.  His  suggestion  was 
received,  as  might  have  been  expected,  with  diffidence,  but 
by  urgent  advocacy  of  his  plan  he  finally  induced  his  prin- 
cipal to  permit  him  to  make  the  change.  This  permission 
was  granted,  but  with  manifest  pessimism  as  to  the  re- 
sult. The  outcome  has  been  a  revolution  in  the  systems 
followed  previous  to  that  time. 

"  We  will  give  jou  credit."  This  is  the  burden,  and, 
in  some  cases,  the  exact  wording  of  signs  that  challenge 


96  CREDIT  AND  ITS  USES 

the  attention  of  occupants  of  street  cars,  and  pedestrians, 
and  which  are  found  in  attractive,  well- worded  advertise- 
ments in  the  newspapers.  Credit  for  everything — house- 
hold goods,  furniture,  etc. — at  prices  which  fully  admit 
of  the  long  credit  extended  under  chattel  mortgage  protec- 
tion. To  avail  themselves  of  this  credit  and  its  so-called 
advantages,  people  place  themselves  under  burdensome  ob- 
ligations, and — ^what  is  the  worst  feature  of  the  transaction 
— buy  more  than  they  have  any  use  for,  more  than  they 
have  a  right  to  purchase,  their  means  considered,  and  are 
led  into  expensive  habits  which  are  far  more  difficult  to 
overcome  than  to  acquire.  Clothing  is  another  item  which 
retail  houses  are  selling  on  credit,  and  the  unfortunate 
part  of  it  all  is  that  those  least  qualified  to  afford  such 
expenditures  are  led  into  making  them. 

Agents  for  jewelry,  books,  etc.,  go  from  business  house 
to  business  house  importuning  the  employees  to  purchase 
their  wares,  the  favorite  argument  being,  "  You  only  have 
to  pay  one  dollar  or  two  dollars  per  month,"  as  the  case 
may  be.  Equally  alluring  is  the  advice  of  many  adver- 
tisements, of  one  of  which  the  following  is  a  literal  tran- 
scription : 

"  To  achieve  success  you  must  look  successful.  Use  your  credit. 
Wear  a  diamond.  Diamonds  win  hearts.  Diamonds  increase  in 
value  twenty  per  cent  per  year." 

What  a  person  does  not  need  or  require,  in  the  actual 
acceptance  of  these  words,  is  not  cheap,  and  should  not  be 
purchased,  no  matter  how  favorable  the  terras.  The  evil 
of  all  this  consists  not  solely  in  the  fact  that  those  han- 
dling the  classes  of  goods  enumerated  realize  an  abnormally 
high  price  for  them,  but  that  a  large  number  who  buy  do 


INDIVIDUAL  OR  PERSONAL  CREDIT  97 

SO  in  the  exercise  of  extravagance,  "which  leads  to  other 
things  more  reprehensible.  Unable  to  pay,  they  leave 
their  old  surroundings,  and  strive  to  hold  unjustly  the 
property  they  have  agreed  to  surrender  in  the  event  of 
their  failure  to  pay  for  it.  In  arranging  the  price  at 
which  these  goods  are  placed  upon  the  market,  due  pro- 
vision is  unquestionably  made  for  losses  from  various 
causes,  and  a  faint  idea  may  be  gained  of  the  percentage 
of  profit  figured  in  order  to  cover  it. 

The  willingness  of  mercantile  houses  to  extend  credit 
manifests  itself  not  only  in  liberal  treatment  to  those  who 
seek  such  credit,  but  it  has  become  the  practice  actually  to 
solicit  patronage,  offering  the  inducement  of  credit  favors 
as  a  leading  argument.  This  practice  is  not  part  of  the 
general  scheme  to  which  reference  has  been  made  of  the 
"  We  will  give  you  credit "  class,  but  representative  con- 
cerns write  nicely  worded  letters  to  a  large  number  of 
people,  stating  that  they  were  ready  to  open  accounts  with 
the  recipients,  or  "  we  have  placed  your  name  upon  our 
list  for  a  running  account,  and  will  be  pleased  to  have 
you  avail  yourself  of  it."  It  must  happen  that  in  this 
way  a  great  many  undesirable  people  are  solicited,  and 
their  business  accepted.  The  lists  from  which  these  names 
are  taken  are  usually  those  found  in  "  elite  directories," 
than  which  no  more  unreliable  basis  could  be  thought  of. 
These  directories  contain  the  names  of  people  who  reside 
in  certain  fashionable  sections  of  cities,  and  it  is  pre- 
sumed, evidently,  that  the  mere  fact  of  residence  in  such 
a  section  presupposes  means  and  good  paying  qualities. 
To  those  who  have  looked  into  the  subject  and  discovered 
the  scrimping  that  is  practiced  in  order  to  support  the 
flaunting  extravagance  of  many  of  these  people,  and  usu- 


98  CREDIT   AND   ITS  USES 

ally  at  the  expense  of  the  grocer,  butcher,  milkman,  etc., 
the  folly  of  such  general  solicitation  of  credit  accounts 
seems  deplorable.  It  will  not  answer  to  say  that  even  in 
the  event  of  people  taking  advantage  of  these  offers  to 
open  accounts,  that  when  they  are  investigated  and  found 
not  entirely  desirable  they  can  be  refused.  That  is  not 
the  way  the  thing  is  done.  A  call  is  made  in  answer 
to  the  note  of  invitation:  a  few  goods  selected,  charged, 
sent  home ;  a  little  later  another  call  is  made,  more  goods 
purchased.  Possibly,  in  the  meantime,  unfavorable  in- 
formation has  been  secured.  The  owner  or  manager  or 
credit  clerk  of  the  house,  with  profound  apologies,  makes 
known  the  fact  that  the  demon  of  doubt  has  entered  his 
mind  in  regard  to  the  desirability  of  the  account.  Then 
behold  the  virtuous  indignation — the  family  honor  im- 
pugned— the  explanations,  clever  to  a  degree,  especially 
if  conveyed  with  the  convincing  subtlety  of  a  bright- 
minded  woman.  Then  Mr.  Owner  or  Mr.  Manager  or 
Mr.  Credit  Man  very  often  comes  to  the  conclusion  that 
his  information  may  have  been  slightly  biased — that  it 
may  have  been  unfavorably  colored  by  a  jealous  com- 
petitor, then  Milady  gets  the  goods.  It  would  be  useless 
to  maintain  that  the  offer  to  give  the  credit  in  the  first 
place  has  not  had  an  embarrassing  effect  upon  the  house, 
for  such  an  effect  is  undeniable. 

"  The  age  of  luxury  "  is  but  another  name  for  "  the 
age  of  extravagance."  To  the  extent  that  individual  or 
personal  credit  is  responsible  for  these  conditions,  reme- 
dial methods  and  principles,  containing  nothing  of  harsh- 
ness or  drasticity,  should  be  developed  and  inculcated. 


CHAPTER    VII 


COMMEKCIAL    CEEDIT 


The  field  of  commercial  credit  is  represented  by  the 
demands  and  possibilities  of  trade  interchange.  Its  scope 
is  therefore  an  expansive  one,  extending  in  area  as  the 
influence  of  civilization  becomes  wider,  and  increasing 
in  its  activities  as  the  volume  of  trade  grows  larger. 
Through  the  operations  of  commercial  credit  vast  stores 
of  goods  pass  from  hand  to  hand,  and  finally  reach  their 
destined  goal — consumption,  in  the  natural  course,  or  an- 
nihilation, as  in  the  case,  for  instance,  of  the  munitions 
of  war.  It  is  not  necessary  to  recur  to  the  vital  infiuence 
of  credit  in  the  promotion  of  trade  and  the  expansion  of 
commerce,  although  in  no  respect  are  the  forces  of  credit 
more  thoroughly  exemplified  than  in  the  commercial  world. 
In  commerce  the  credit  system  manifests  its  tremendous 
power  in  a  manner  that  appeals  more  strongly  to  the 
understanding  and  appreciation  of  the  individual  than  it 
does  in  other  branches  of  business  activity.  This  is  due 
to  the  fact  that  commercial  transactions  are  on  a  much 
larger  scale  than  transactions  in  individual  credit,  and 
there  is  a  greater  degree  of  responsibility  exacted  by  those 
who  extend  the  credit;  for  this  reason  the  means  at  their 
disposal  for  educating  the  people  as  to  the  proper  require- 
ments of  credit  are  infinitely  better.    This  condition  makes 

99 


100  CREDIT  AND  ITS  USES 

for  a  much  safer  basis  of  credit  dispensation  than  would 
be  possible  if  the  necessities  of  commercial  life  did  not 
impose  upon  those  who  partake  of  it  a  respect  for  the 
obligations  of  tlie  credit  system. 

The  channels  through  which  commercial  credit  oper- 
ates are  various:  (1)  There  is  the  raw  material,  largely 
direct  from  the  bed  of  nature.  This  raw  material  must 
be  conveyed  to  those  who  will  weave  it,  or  otherwise  de- 
velop it,  into  fabrics  or  articles  answering  every  known 
demand  of  the  human  family.  (2)  The  finished  or  manu- 
factured article  is  then  to  be  turned  over  to  those  who 
have  a  market  for  it,  or  who  have  the  ability  and  means 
to  create  a  market  for  it.  (3)  The  men  of  the  market, 
in  turn,  dispose  of  this  article  in  quantities  according  to 
the  demands  of  the  retailers.  (4)  The  latter  are  those 
who  cater  to  the  multitude,  the  unit  of  which  is  the  con- 
sumer, who  typifies  the  last  station  or  stopping  place  on 
the  road  of  commerce. 

Goods  are  moved  through  the  different  channels  of 
commercial  intercourse  by  the  medium  of  credit.  Sup- 
pose that  the  producer  is  not  equipped  with  the  capital 
necessary  to  conduct  his  operations,  and  is  compelled  to 
seek  accommodation  from  his  bank.  Tliis  he  obtains  either 
on  the  score  of  the  confidence  entertained  in  his  living 
up  to  his  promises,  or  by  providing  the  bank  wnth  security 
upon  certain  of  his  belongings  or  upon  the  finished  product 
he  is  about  to  market.  The  manufacturer  to  whom  he 
sells  may  be  required  to  give  his  note  to  the  producer.  In 
this  note  the  producer  has  one  of  the  best  bases  of  credit, 
viz.,  a  negotiable  instrument  "which  the  bank  will  pur- 
chase or  discount,  assuming  that  the  credit  strength  of 
those  whose  names  appear  upon  the  note  is  of  a  satisfac- 


COMMERCIAL  CREDIT  101 

torj  character.  This  operation  is  continued  through  the 
entire  commercial  family,  each  succeeding  recipient  of  the 
goods  furnishing  to  the  seller  a  means  of  carrying  his 
account ;  and  if  the  seller  has  not  the  availahle  capital,  he 
uses  these  means  for  the  pilrpose  of  securing  further  credit 
without  which  he  would  be  unable  to  continue  his  busi- 
ness. All  trades  require  the  use  of  considerable  cash  for 
the  payment  of  employees  and  for  other  purposes;  and 
this  requirement  imposes  upon  business  men  the  necessity 
of  making  constant  use  of  their  credit.  This  is  also 
required  to  effect  the  purchase  of  new  supplies,  to  dis- 
charge maturing  obligations,  and  to  institute  repairs  and 
betterments  in  the  business  plant.  It  is  the  fact  that  few, 
if  any,  business  establishments  are  so  circumstanced,  in 
respect  to  the  necessary  volume  of  available  cash,  as  to  be 
able  to  dispense  with  credit,  that  makes  credit  so  indis- 
pensable a  factor  in  commercial  life.  The  limit  of  the 
volume  of  currency  disproves  such  a  possibility,  and  leaves 
the  commercial  public  under  the  dominion  of  the  credtt-i 
system.  It  is  apparent  what  a  boon  credit  represents  to 
business  men,  and  how  its  absence  would  dwarf  all  at-| 
tempts  at  extended  business  enterprises.  Mr.  Macleod 
says  that  the  credit  of  which  the  producer,  the  manufac-, 
turer,  the  middleman,  and  the  retailer  avail  themselves! 
"  is  capital  to  these  classes,  and  that  it  stands  for  use  or\ 
enjoyment  to  the  last  class — ^the  individuals  and  consum-l 
ers."  The  latter  have  less  recourse  to  credit  than  those 
who  are  actively  engaged  in  business,  for  the  reason  that 
their  wants  are  fewer  and  simpler.  The  currency  of  the 
country  circulates  among  the  consumers  to  a  greater  ex- 
tent than  among  others,  as  wages  and  other  small  debts 
are  paid  in  cash  and  not  in  instruments  of  credit.     The 


102  CREDIT  AND   ITS   USES 

consumers  are   therefore   in   a   position  to  give   casK   or 
currency  in  exchange  for  goods  purchased. 

Commercial  credit  is  the  great  pillar  of  the  credit 
structure,  for  from  commerce  flows  the  ever-strengthening 
tide  of  wealth  that  finds  its  way  into  the  different  reposi- 
tories for  funds — cither  to  banks  for  safe-keeping  or  into 
corporate  or  public  credit  for  safe  investment  and  income- 
producing  purposes.  If  it  were  not  for  the  life  that  credit 
gives  to  commercial  transactions,  and  the  constant  inter- 
change of  goods  it  induces,  there  would  be  little  necessity 
for  banks  and  other  financial  enterprises.  It  is  commer- 
cial credit  that  brings  into  being  the  vast  quantity  of 
instruments  of  credit,  especially  bills  of  exchange  and 
promissory  notes,  which  represent  the  great  bulk  of  the 
business  of  banks.  An  example  of  the  operations 
through  which  men  find  it  necessary  to  depend  upon 
their  credit  is  admirably  expressed  in  the  following  hy 
Mr.  Bagehot: 

"The  new  trader  has  obviously  an  immense  advantage  in  thft 
struggle  of  trade.  If  a  merchant  have  £50,000,  all  his  own,  to 
gain  ten  per  cent  on  it  he  must  make  £5,000  a  year,  and  must  charge 
for  his  goods  accordingly;  but  if  another  has  only  £10,000,  and  bor- 
rows £40,000  by  discounts  (no  extreme  instance  in  our  modern 
trade),  he  has  the  same  capital  of  £50,000  to  use,  and  can  sell  much 
cheaper.  If  the  rate  at  which  he  borrows  be  five  per  cent,  he  will 
have  to  pay  £2,000  a  year;  and  if,  like  the  old  trader,  he  make 
£5,000  a  year,  he  will  still,  after  paying  his  interest,  obtain  £3,000 
a  year,  or  thirty  per  cent  on  his  own  £10,000.  As  most  merchants 
are  content  with  much  less  than  thirty  per  cent,  he  will  be  able,  if 
he  wishes,  to  forego  some  of  that  profit,  lower  the  price  of  the  com- 
modity, and  drive  the  old-fashioned  trader — the  man  who  trades 
on  his  own  capital — out  of  the  market.  In  modern  English  business, 
owing  to  the  certainty  of  obtaining  loans  on  discount  of  bills  or 
otherwise  at  a  moderate  rate  of  interest,  there  is  a  steady  bounty 


COMMERCIAL  CREDIT  103 

on  trading  with  borrowed  capital,  and  a  constant  discouragement 
to  confine  yourself  solely  or  mainly  to  your  own  capital." 

When  it  is  stated  (as  in  the  foregoing)  that  there  is 
"  a  constant  discouragement  to  confine  yourself  solely  or 
mainly  to- your  own  capital,"  it  is  evident  that  the  trend 
of  business  is  toward  a  credit  basis,  for  nothing  but  such 
a  condition  would  warrant  this  pronouncement.  This  con- 
dition, which  indicates  a  marked  axpansion  of  the  credit 
system,  carries  with  it  a  danger  which  must  not  be  lost 
sight  of  nor  underestimated,  viz.,  many  im worthy  per- 
sons have  sought  and  secured  credit  to  which  they  were 
not  entitled,  and  which  they  have  persistently  abused. 
On  the  other  hand,  the  advantages  and  blessings  of  this 
expansion  have  been  of  incalculable  value,  and  have 
wrought  universal  good  in  the  opportunities  afforded  to 
deserving  and  competent  persons  to  enter  and  remain  in 
business  life.  The  economic  influence  of  "  our  own  times  " 
has  been  to  create  such  opportunities  and  preserve  them 
to  those  who  are  worthy,  thus  augmenting  the  general 
wealth,  and  adding  to  the  store  of  personal  accomplish- 
ment and  human  happiness. 

The  example  cited  by  Mr.  Bagehot  is  not  an  extreme 
one,  but  an  everyday  practice.  It  must  be  remembered, 
however,  that  the  ability  to  borrow  £40,000,  as  suggested, 
on  a  capital  of  £10,000  is  a  privilege  not  given  to  every 
man.  The  one  who  succeeds  in  doing  it  must  have  the 
necessary  qualifications  of  character,  business  reputation, 
and  general  ability ;  otherwise  he  would  not  be  regarded 
as  a  suitable  credit  risk  by  the  banker  or  broker  from  whom 
ho  sought  the  amount  mentioned.  So  that,  added  to  his 
capital  of  £10,000,  he  has  his  personal  qualities  upon 


104  CREDIT  AND  ITS  USES 

which  to  depend,  and  they  represent  a  species  of  wealth 
when  utilized  in  the  quest  of  credit;  or,  as  Mr.  Macleod 
expresses  it: 

"A  merchant's  Wealth,  or  Purchasing  Power,  consists  of  his 
Money,  his  Rights  to  demand  Money,  i.  e.,  the  Bank  Notes,  Cheques, 
Bills  of  Exchange,  or  other  Securities  he  may  possess :  and  his  Credit, 
i.  e.,  his  Right  to  the  future  products  of  his  industry." 

Out  of  commercial  transactions,  or  the  operation  of 
commercial  credit,  there  arises  a  mass  of  instruments  of 
credit  which  have  a  function  entirely  apart  from  the  mere 
evidencing  of  a  debt  due  from  one  person  to  another. 
The  motive  in  requiring  the  tender  of  a  bill  of  exchange 
or  a  promissory  note  as  a  precedent  to  the  delivery  of  a 
bill  of  goods  is  invariably  to  enable  the  holder  of  the  bill 
of  exchange  to  utilize  it  for  his  own  advantage  in  creating 
or  maintaining  his  credit.  The  consequence  is  that  a 
bill  so  used  passes  from  one  person  to  another  until  it  has 
acted  as  a  medium  of  help  to  a  large  number  of  people, 
either  in  canceling  some  old  indebtedness  or  in  starting 
a  new  credit.     Mr.  Mill  says: 

"It  has  become  one  of  the  chief  functions  of  bills  of  exchange 
to  serve  as  a  means  by  which  a  debt  due  from  one  person  can  thus 
be  made  available  for  obtaining  credit  from  another." 

Mr.  Macleod  has  also  explained  this  phase  of  com- 
mercial credit  as  follows: 

"Suppose  that  the  merchant  has  confidence  in  the  wholesale 
dealer's  character  and  integrity,  he  sells  the  goods  to  the  wholesale 
dealer  on  credit :  that  is,  he  sells  him  the  goods,  and  instead  of  the 
actual  money,  he  takes  his  promise  to  pay  three  months  after  date. 
That  is,  he  sells  the  goods  for  a  Credit,  or  Debt,  or  a  Right  of 
Action  instead  of  for  Money." 


COMMERCIAL  CREDIT  105 

"Credit  in  this  sense  causes  the  same  circulation  as  money." 
"Hence  Credit  is  circulating  medium  exactly  as  money  is." 

Attempts  to  read  into  the  dispensation  of  commercial 
credit  any  hard  and  fast  rule  of  the  "  goods  to  goods  " 
order  is  a  fatuous  one  in  view  of  the  general  interpreta- 
tion of  that  question,  as  well  as  the  economic  necessities 
it  represents.  In  England  it  has  not  been  an  unusual 
thing  for  bills  of  exchange  which  were  the  outgTOwth  of 
commercial  credit  to  form  a  considerable  portion  of  the 
circulating  medium.  This  character  of  currency,  which 
is  nothing  more  than  a  symbol  of  credit,  has  been  quite  as 
efficacious  in  the  financial  and  commercial  life  of  the  na- 
tion as  gold,  silver,  or  bank  notes.  It  is  true  that  a  liberal 
supply  of  gold  in  the  market  assists  the  use  of  bills 
of  exchange  as  circulating  medium ;  for,  while  the 
public  is  entirely  satisfied  with  the  state  of  the  gold 
supply,  it  is  content  to  utilize  other  and  cJieaper  forms 
of  circulating  medium.  While  this  condition  exists,  the 
opportunities  afforded  to  extend  one's  credit  through 
the  use  of  bills  of  exchange  or  promissory  notes  are 
amplified,  and  it  is  then  that  the  temptation  to  specu- 
late arises,  with  results  which  have  already  been  indi- 
cated. 

To  appreciate  the  great  advantage  of  the  credit  system, 
it  would  be  well  to  consider  the  effects  upon  our  commer- 
cial life  if  transactions  were  regulated  by  the  use  of  cash 
only,  or,  to  use  a  favorite  business  expression,  "  if  we 
were  on  a  cash  basis,"  the  word  cash  being  used  in  the 
sense  of  actual  currency. 

(1)  The  relatively  small  quantity  of  cash  available 
would  prejudice  its  use  in  the  settlement  or  adjustment  of 


106  CREDIT  AND   ITS   USES 

commercial  transactions,  and,  in  fact,  render  such  trans- 
actions, in  the  gross,  impossible. 

(2)  The  cost  of  its  transportation,  always  a  consid- 
erable item,  would  be  found  onerous. 

(3)  The  loss  of  interest  due  to  holding  large  amounts 
of  currency,  and  the  inutility  of  the  commodity  itself. 

(4)  It  would  be  impossible  to  extend  the  operations 
of  trade,  as  modern  usage  has  done,  and  this  modern 
usage  is  simply  credit.  Men  would  not,  in  fact  they 
could  not,  lend  their  cash  to  others  who  desired  it  for 
the  purposes  of  capital — no  matter  how  worthy  they 
might  be — for  the  holders  would  need  it  for  their  o"\vn 
requirements.  The  opportunity  for  embarking  in  busi- 
ness, and  continuing  in  it,  would  be  closed  to  the  great 
mass  of  those  who  would  otherwise  be  actively  engaged 
in  commercial  life.  These  ideas  have  been  explained  at 
length  in  the  description  of  the  credit  system,  but  recur- 
rence has  been  made  to  them  here  because  of  their  great 
pertinency  to  the  subject  now  under  discussion. 

It  was  the  very  fact  that  commercial  credit  was  not 
possible  if  people  were  supposed  to  operate  on  a  cash 
basis  that  induced  the  use  of  credit  instruments.  The 
scarcity  of  the  precious  metals  brought  about  the  use  of 
bank  notes  (a  form  of  credit),  which  in  some  instances 
represent  credit  in  its  unbridled  capacity. 

Commercial  credit  merges  itself  into  banking  credit 
by  purely  natural  processes,  the  former  becoming  the  great 
feeder  to  the  latter,  which  in  turn  assumes  the  control  of 
the  commercial  market  in  a  universal  sense. 

Commercial  credit  has  another  well-known  form,  viz., 
book  credits.  !N"owadays,  in  nearly  all  cases  when  mer- 
chants buy  from  each  other,  the  only  evidences  of  the  sale 


COMMERCIAL  CREDIT  107 

expressed  are  the  entry  of  the  charge  in  the  ledger  of 
the  seller,  and  the  delivery  to  and  acceptance  by  the  pur- 
chaser of  an  invoice  for  the  amount  of  the  goods  sold. 
When  the  due  date  arrives,  the  purchaser  is  supposed  to 
send  to  the  seller  the  amount  due  (usually  tendered,  in 
the  form  of  a  check  on  a  bank),  and  the  seller  enters  the 
evidence  of  the  payment  against  the  accoimt,  and  the 
transaction  is  closed.  It  will  be  evident  that  this  charac- 
ter of  credit  (book)  has  not  performed  the  same  useful 
function  in  the  commercial  or  financial  world  as  the  credit 
in  consideration  of  which  a  bill  of  exchange  or  promissory 
note  was  passed.  In  the  latter  case  the  seller  could  avail 
himself  almost  immediately  of  the  bill,  and  with  it  either 
pay  an  outstanding  account  or  bill  against  himself  or  use 
it  for  the  purchase  of  new  supplies  or  in  creating  addi- 
tional necessary  credit.  It  is  true  that  book  credits  may 
be  used  for  the  purpose  of  securing  funds,  and  a  method 
which  will  be  referred  to  at  greater  length  in  this  chap- 
ter is  often  resorted  to.  There  is  one  very  important 
respect  in  which  a  book  credit  is  not  as  safe  and  satis- 
factory a  form  of  security  as  a  bill  of  exchange  or  other 
credit  instruments  employed,  and  that  is,  that  while  the 
holder  or  o-^Tier  of  a  book  account  or  credit  may  be  able 
to  dispose  of  it,  or  raise  funds  upon  it,  the  purchaser  or 
discounter  of  such  an  account  or  credit  must  necessarily 
look  for  its  validity  in  the  good  character  and  representa- 
tions of  the  one  offering  the  account.  It  has  behind  it 
nothing  but  the  evidence  of  his  books,  his  statement  as 
to  the  ownership  of  it,  and  the  correctness  of  the  amount 
claimed.  People  have  been  known  to  dispose  of  accounts 
that  were  entirely  spurious.  In  the  case  of  a  bill  of  ex- 
change or  promissory  note,  the  evidence  of  the  debt  is 


108  CREDIT  AND  ITS  USES 

verified  by  the  signature  of  the  maker  of  the  paper.  At- 
tention has  been  called  to  "  fictitious  "  or  purely  accom- 
modation paper,  but  the  conditions  entering  into  this  char- 
acter of  credit  instrument  do  not  affect  the  point  under 
discussion. 

Commercial  credit  exerts  a  greater  influence  upon  the 
tendencies  of  the  people  than  almost  any  other  phase  of 
human  activity.  This  influence  manifests  itself  in  the 
social  as  well  as  the  economic  departments  of  life.  Mr. 
Aldrich  writes: 

"Money  economy  gave  liberty,  credit  gave  opportunity.  By 
credit  the  competitive  system  has  developed  so  as  to  be  able  to 
replace  the  primitive  group  system,  and  even  surpass  its  accom- 
plishments. Without  credit,  individuals  could  not  extend  their 
operations  so  as  to  supersede  the  collective  system  which  subsisted 
as  some  form  of  natural  or  involuntary  cooperation  until  the  rise 
of  credit  in  Europe." 

The  liberty  which  was  the  product  of  "  money  econ- 
omy "  would  have  failed  in  its  beneficent  effects  upon 
the  masses  of  the  people  if  credit  had  not  come  forward 
as  a  powerful  auxiliary  and  made  clear  the  opportunities 
which  the  new  dispensation  had  created.  One  of  the  prin- 
cipal elements  of  the  ''  competitive  system "  is  opportu- 
nity. The  doors  of  that  system  are  always  open  "  to  those 
who  are  disposed  to  hazard  their  fortunes  and  future." 
For  many  who  bid  for  a  place  of  honor  in  the  competitive 
system  are  risking  all  they  possess.  Their  failure  to 
achieve  results  means  impoverishment  and  disappointment 
to  such  an  extent  that  they  never  again  summon  the  cour- 
age to  battle  for  advancement.  The  competitive  system 
does  not  display  all  its  power  in  the  fierce  struggles  for 
commercial   supremacy   in   thickly    settled    and   wealthy 


COMMERCIAL  CREDIT  109 

communities.  It  shows  some  of  its  best  results  in  the 
energy  with  whicli  new  localities  establish  themselves  and 
compete  with  the  older  and  better  known  markets.  In 
these  new  localities  the  excellent  effects  of  commercial 
credit  are  particularly  sho^vn.  True  to  the  real  spirit  of 
commercial  advancement,  the  pioneers  of  progress  seek  to 
open  new  fields  of  agricultural  and  industrial  activity. 
In  all  new  settlements  the  great  want  is  money,  and  the 
only  element  that  prevents  such  settlements  from  being 
utter  failures  is  credit.  AVith  any  reasonable  prospect  of 
success  before  them,  the  merchants  of  a  new  settlement 
have  little  difficulty  in  securing  from  those  of  the  older 
and  wealthier  communities  a  fair  degree  of  credit.  The 
credit  which  they  enjoy  enables  them,  in  turn,  to  extend 
credit  to  nontraders,  who,  especially  in  a  new  settlement, 
require  this  credit  in  equal  measure  with  those  engaged 
in  mercantile  pursuits.  In  new  countries  or  districts 
there  must  be  a  great  deal  of  prospecting,  and  the  inhabi- 
tants must  avail  themselves  of  credit  in  the  meantime. 
Without  credit  it  would  be  impossible  to  upbuild  new 
territories  with  tlie  celerity  and  success  that  the  presence 
of  credit  insures.  It  has  been  stated  that  "  in  colonies 
and  all  rude  countries  there  is  no  large  sum  of  transfer- 
able money;  there  is  no  fund  from  wdiich  you  can  bor- 
row." In  order,  therefore,  that  those  who  cast  their  for- 
tunes in  rude  countries  may  possess  themselves  of  tlie 
necessary  capital,  they  are  compelled  to  draw  upon  the 
funds  of  long-established  localities  and  nations.  The 
freedom  with  which  they  are  permitted  to  do  so  indicates 
the  state  of  the  credit  extended  to  them.  It  is  very  im- 
portant, however,  that  they  should  not  be  given  too  much 
latitude,  for  this  is  the  cause  of  booms  and  speculations; 


110  CREDIT  AND  ITS  USES 

all  of  which  again  enforces  the  thought  that  credit  to  be 
safe  must  be  restricted  within  legitimate  boundaries. 

The  methods  of  commercial  credit  have  undergone 
many  changes,  growing  out  of  a  greater  store  of  wealth 
and  the  expansion  of  the  credit  system.  The  old  plan 
upon  which  credit  was  dispensed  involved  the  intermis- 
sion of  a  long  term  before  payment  would  become  due, 
and  the  necessity  of  a  liberal  "  time  limit  "  Avas  due  to 
conditions  which  were,  at  that  period,  of  an  uncontrol- 
lable character.  Long  time  was  the  custom,  and  unless 
it  could  be  secured,  the  merchant  was  better  without  the 
credit.  To  accept  it  on  any  other  basis  probably  meant 
failure  to  meet  his  engagements,  with  the  consequent  sac- 
rifice of  his  business  reputation,  upon  which  his  capacity 
to  command  credit  principally  depended.  There  were 
many  excellent  reasons  why  transactions  should  be  based 
upon  extended  terms  of  credit,  to  some  of  which  reference 
will  be  made. 

(a)  The  means  of  communication  were  in  a  compara- 
tively archaic  state,  and  it  therefore  required  considerable 
time  to  reach  the  different  markets.  This  great  loss  of 
time  could  not  be  endured  except  at  certain  seasons,  when 
it  was  absolutely  necessary  for  the  merchant  to  visit  the 
market. 

(b)  The  foregoing  reason  also  operated  to  prevent  the 
general  use  of  traveling  salesmen,  for  the  time  lost  in 
travel  meant  that  they  could  not  meet  a  sufiicient  number 
of  their  customers  in  a  given  period  to  make  trips  pay. 

(c)  The  consequence  of  these  conditions  was  that  when 
the  merchant  visited  the  market  he  bought  a  large  stock, 
and  had  to  select  many  goods  that  would  not  prove  as 
salable  as  others. 


COMMERCIAL  CREDIT  111 

(d)  The  practice  of  buying  large  stocks  carried  with 
it  the  danger  of  overbuying,  and  the  latter  was,  under 
such  circumstances,  an  almost  pardonable  error.  It  was 
a  difficult  matter  to  measure  the  probable  sales  of  a  season, 
especially  if  the  community  was  a  rapidly  growing  one. 

In  order,  however,  that  the  privilege  of  the  long  time 
and  liberal  amount  of  credit  accorded  to  the  merchant 
should  not  react  to  the  detriment  of  the  wholesaler  or 
jobber,  he  required  that  the  merchant  should  give  a  prom- 
issory note  at  the  time  of  sale,  so  that  he  could  utilize 
this  note  in  raising  funds  with  which  to  operate  his  own 
business.  To  do  an  extended  credit  business  on  long 
terms  involves  the  use  of  a  large  amount  of  very  flexible 
capital,  with  which  few  concerns  have  been  provided  at 
any  period  of  our  history. 

Notes  given  by  merchants  in  the  manner  described 
have  always  been  considered  one  of  the  best  forms  of 
bankable  paper,  and  their  negotiation  into  loans  was  a 
matter  of  ordinary  financing,  and  one  to  which  constant 
resort  was  made.  The  existence  of  this  mass  of  commer- 
cial paper  (credit)  brought  into  existence  a  class  of  men 
who  made  it,  and  who  still  make  it,  their  special  business 
to  market  this  paper,  and  who  are  known  as  note  brokers. 
The  latter  represent,  however,  several  different  classes, 
from  those  who  are  in  reality  bankers  to  those  who  con- 
stitute a  middle  and  very  substantial  class,  who  sell  to 
banks  and  other  financial  institutions,  and,  lastly,  those 
who  are  known,  for  excellent  reasons  (which  it  is  not 
necessary  to  discuss),  as  "note  shavers."  This  feature 
of  the  credit  system  made  the  note  broker  a  necessary  and 
powerful  entity  in  commercial  and  banking  credit.  It 
might  be  asked  why  banks  themselves  could  not  have  per- 


112  CREDIT  AND  ITS  USES 

formed  all  the  functions  of  the  note  broker,  and  thereby 
dispense  with  his  services.  A  few  reasons  may  be  given 
why  this  was  not  done:  (1)  Note  brokers  made  the  ac- 
ceptability of  the  paper  offered  a  special  study,  and  were 
therefore  better  advised  as  to  its  character.  (2)  To  do 
this  would  have  required  the  exclusive  attention  of  one 
or  more  men  for  every  bank,  and  this  in  itself  would 
entail  a  large  and  disqualifying  item  of  expense.  (3) 
The  fact  of  not  being  called  upon  to  exercise  this  super- 
vision meant  a  saving  of  energy  on  the  part  of  the 
bank's  officers  which  could  be  utilized  to  advantage  in 
other  directions.  (4)  Custom  warranting  a  dependence 
upon  the  representations  of  the  note  broker,  the  bank  was 
in  a  position  to  act  quickly  in  reference  to  a  discount  or 
purchase  of  a  quantity  of  paper — a  very  important  con- 
sideration in  case  the  bank  had  a  large  sum  of  money 
lying  idle  which  should  be  earning  an  income.  (5)  In 
certain  cases  where  the  bank  might  not,  for  excellent 
reasons,  be  prepared  to  accept  the  single-name  paper  of 
merchants,  the  note  broker  could,  if  so  disposed,  act  as 
an  indorser,  thus  making  the  offering  entirely  acceptable 
to  the  bank,  and  it  was  an  advantageous  thing  to  be  able 
to  enlist,  if  necessary,  a  responsible  indorser. 

It  is  pertinent  at  this  time  to  say  that  the  standing 
of  the  merchant  continues  to  determine  the  rate  of  in- 
terest charged,  which  is  the  barometer  of  the  credit  of  the 
maker  of  a  note.  Modern  methods  of  communication  in 
railway,  mail  service,  telegTaph,  and  telephone  have 
wrought  the  changes  to  which  reference  has  been  made, 
and  occasioned  the  disuse  of  note  settlements  in  the  form 
and  to  the  extent  they  were  formerly  employed.  The 
ability  to  reach  the  markets  quickly,  to  order  goods  by 


COMMERCIAL  CREDIT  113 

mail,  telegraph,  and  telephone,  has  enabled  the  merchant 
of  almost  any  section  of  the  country  to  supply  his  wants 
as  they  manifest  themselves.  This  has  had  the  effect  of 
cutting  down  the  time  limit,  for  the  conditions  previously 
stated  no  longer  obtain.  When  to  this  is  added  the  fact 
that  the  banking  accommodation  is  more  liberal  and  rami- 
fied than  ever  before,  it  is  not  strange  that  the  merchant 
should  see  the  advantage  of  utilizing  his  credit  at  the 
bank,  securing  the  funds  which  enable  him  to  pay  in 
much  quicker  time,  and  obviating  the  necessity  of  taking 
advantage  of  the  long  time  formerly  sought,  and  for  ivhich 
he  had  to  pay  in  advanced  price  and  interest  charges. 
He  now  utilizes  his  bank  credit  and  discounts  his  bills, 
i.  e.,  he  takes  advantage  of  the  largest  discount  offered 
for  a  quick  settlement. 

Prompt  settlement  (especially  of  note  obligations)  is 
indispensable  to  the  maintenance  of  good  credit.  In  re- 
ferring to  the  desire  of  merchants  to  fulfill  their  contracts 
in  a  timely  manner,  Mr.  Bagehot  says,  "  what  is  necessary 
to  meet  their  acceptances  they  will  borrow,  pay  for  it 
what  they  may — they  had  better  pay  any  price  than  per- 
mit those  acceptances  to  be  dishonored."  It  is  a  fact  that 
the  failure  to  meet  a  note  promptly  is  counted  as  a  black 
mark  against  a  merchant,  while  in  the  case  of  a  book 
credit,  a  delay  to  pay  promptly  (three  or  four  days  and 
more,  sometimes)  causes  no  particular  unrest.  This  dif- 
ference it  is  hard  to  satisfactorily  explain,  but  probably 
consists  in  the  more  exacting  nature  of  a  written  as  against 
an  unwritten  agreement. 

The  discontinuance  of  "  long  time,"  such  as  four,  six, 
and  eight  months,  has  had  the  effect  of  introducing  the 
feature  of  "  dating "   into  commercial  transactions  and 


114  CREDIT  AND  ITS  USES 

credit.  A  "  dating "  of  thirty  daj3  or  sixty  days  indi- 
cates that  the  term  of  the  credit,  whatever  it  may  be,  does 
not  begin  to  date  until  the  expiration  of  the  term  of 
dating.  For  instance,  a  bill  sold  and  charged  on  January 
1,  1906,  with  a  dating  of  sixty  days — terms,  two  per  cent 
ten  days  and  net  thirty  days — is  not  due  until  April  Ist, 
as  the  dating  does  not  expire  until  March  Ist,  and  the 
terms  being  thirty  days  carry  it  to  April  Ist.  The  pur- 
chaser has  the  option  of  paying  it  whenever  he  chooses, 
but  payment  cannot  be  insisted  upon  until  April  1st.  A 
merchant  purchasing  a  bill  under  the  foregoing  terms 
would,  if  he  were  in  a  position  to  do  so,  pay  the  bill  at 
the  end  of  ten  days  (January  10th),  deduct  two-per-cent 
discount,  and  also  deduct  interest  at  the  rate  of  six  per 
cent  per  annum  for  the  unexpired  term  of  sixty  days  (the 
dating),  of  which  time  he  has  not  availed  himself.  With 
the  general  shortening  of  terms,  dating  was  given  to  cover 
the  period  during  which  the  goods  would  be  in  transit,  or 
in  process  of  unpacking  and  marking.  It  was  also  used 
as  an  inducement  to  merchants  to  make  purchases  before 
the  seasons  opened,  or  in  other  words  to  anticipate  their 
wants.  From  a  concession  on  the  part  of  the  wholesaler 
and  jobber,  the  idea  of  dating  seems  to  have  become  a 
right  demanded  by  the  merchant,  and  a  settled  principle 
in  commercial  practice  or  credit.  It  has  led  to  an  undue 
anticipation  of  wants  on  the  part  of  those  engaged  in  all 
divisions  of  trade,  from  the  manufacturer  to  the  retailer ; 
and  in  lines  where  the  element  of  fashion  is  a  leading 
one,  and  subject  to  sudden  changes,  it  has  been  the  cause 
of  considerable  loss  to  many. 

Reference  has  been  made  to  a  method  by  which  "  book 
credits  "  are  utilized  for  the  pui-pose  of  raising  funds  and 


COMMERCIAL  CREDIT  115 

supplying  needed  capital.  It  is  probable  that  this  method 
found  its  inception  in  a  practice  introduced  some  years 
ago,  whereby  a  house  having  no  other  form  of  collateral 
to  offer  its  bank,  and  being  much  in  need  of  money,  in- 
duced its  bank  to  accept  an  assignment  of  certain  accounts. 
Advances  were  made  by  the  bank  to  an  agreed  percentage 
of  the  gross  amount  of  the  accounts  assigned.  This  was 
an  entirely  private  arrangement  between  the  bank  and  its 
customer.  When  the  bank  had  confidence  in  the  integrity 
of  the  assignor  and  in  the  prospects  of  the  business,  it 
would  permit  the  assignor  to  use  the  funds  collected  from 
the  accounts  assigned,  and  in  place  of  these  collected  ac- 
counts, other  and  supposedly  desirable  accounts  were  as- 
signed to  the  bank,  thus  preserving  the  required  ratio 
of  margin.  It  will  be  evident  that  a  bank  lending  under 
such  conditions  must  have  a  good  deal  of  confidence  in 
the  character  and  good  intentions  of  the  borrower,  for  an 
imscrupulous  person  could  deceive  and  defraud  his  banker. 
In  the  event  of  the  failure  of  the  borrower,  or  of  any 
suspense  in  the  relations  between  the  bank  and  him,  the 
bank  would  naturally  enter  upon  the  exercise  of  its  rights 
under  the  assignment,  and  the  persons  owing  the  accounts 
which  had  been  assigned  would  be  notified  to  make  pay- 
ment to  the  bank.  In  some  instances  the  notice  of  the 
assignment  would  be  sent  at  the  time  of  its  execution,  and 
the  debtors  called  upon  to  make  payment  to  the  bank. 
This  method  is  resorted  to  by  commission  houses  which 
are  handling  the  output  of  manufacturers  to  whom  ad- 
vances have  to  be  made,  and  has  contributed  to  establish- 
ing a  new  method  of  invoking  commercial  credit.  The 
consequence  is  that  banking  houses  have  opened  regular 
departments  for  this  character  of  business,  and  many  lead- 


116  CREDIT  AND  ITS  USES 

ing  commission  concerns  have  practically  become  bankers, 
to  such  an  extent  are  they  advancing  upon  and  discount- 
ing accounts.  There  are  concerns  which  make  this  their 
sole  business,  and  some  are  reported  to  be  doing  a  large 
volume  of  business.  Such  concerns  have  behind  them 
banks  or  trust  companies  which  furnish  the  funds  to  pur- 
chase or  discount  accounts,  and  find  in  this  a  very  lucra- 
tive method  of  lending  money.  The  terms  under  which 
this  business  is  done  vary.  In  some  cases  the  accounts 
are  assigned  only  in  the  manner  already  discussed,  and  a 
margin  preserved,  the  borrower  being  charged  a  good  rate 
of  interest  for  the  accommaodation.  In  others  the  ac- 
counts are  bought  outright,  the  purchaser  assuming  all 
the  risk,  and  charging  not  only  a  round  rate  of  interest, 
but  a  bonus  for  the  risk  involved.  In  still  others  the 
accounts  are  assigned,  and  withdrawals  permitted  to  an 
agreed  percentage  (seventy,  eighty,  or  ninety  per  cent,  as 
the  case  may  be),  and  a  heavy  rate  of  interest,  as  well 
as  a  bonus,  charged  for  the  accommodation.  If  the  per- 
centage of  profit  obtainable  in  the  business  will  justify  the 
payment  of  the  high  rate  of  interest  and  bonus  demanded, 
it  may  not  be  in  order  to  criticise  this  method  of  commer- 
cial credit.  It  has  yet  to  be  determined  how  successful 
for  all  parties  concerned  the  practice  involved  is  likely 
to  prove.  This  fact  should  be  borne  in  mind,  that  when- 
ever a  house  is  paying  an  extravagant  rate  of  interest  for 
the  accommodation  it  requires,  the  difference  between 
normal  and  abnormal  interest  is  the  difference  between 
normal  and  abnormal  credit,  and  the  strain  upon  the  credit 
of  an  enterprise  is  bound  to  leave  undesirable  effects. 
The  same  general  rules  should  apply  to  all  the  divisions 
of  credit.     The  same  monitors  should  stand  guard  over 


COMMERCIAL  CREDIT  117 

the  respective  members  of  the  great  credit  family.  These 
rules  and  monitors  are  the  same  in  banking,  capital,  pub- 
lic, individual,  and  commercial  credit — their  names  are 
integrity  (character),  ability,  prudence,  economy,  and 
conservatism. 


PART   THREE 

THE  CREDIT  DEPARTMENT  AND 
SOURCES  OF   CREDIT  INFORMATION 


CHAPTER   VIII 

THE    CEEDIT    DEPAETMENT    IN    BANKING    CREDIT 

System  in  credits  is  exemplified  in  the  methods  of 
credit  departments.  A  credit  department  is  now  regarded 
as  an  essential  adjunct  to  every  well-regulated  business. 
The  banking  community,  however,  has  not  recognized  the 
necessity  of  a  distinct  credit  department  in  the  same  sense 
as  have  commercial  institutions. 

l!Tot  many  years  ago  there  were  comparatively  few 
banks  possessing  a  credit  department;  tq-day  there  are 
more,  but  there  is  still  an  unexplainable  absence  of  this 
systematic  method  of  treating  credit  transactions.  At- 
tempts are  made  to  answer  this  criticism  by  saying  that 
a  credit  department  is  unnecessary,  for  the  reason  that 
the  duties  appertaining  to  it  in  a  commercial  establish- 
ment are  discharged  by  certain  officers  or  employees  of  a 
bank  in  connection  with  their  other  work;  consequently, 
no  necessity  exists  for  an  elaborate  equipment  or  system 
covering  the  relations  of  a  bank  with  its  borrowers,  and 
a  complete  tabulation  of  the  standing,  antecedents,  and 
responsibility  of  such  borrowers. 

The  real  objection  of  banks  to  a  credit  department  here- 
tofore, and  to  some  extent  even  in  this  day,  may  be  found 
in  the  fact  that  it  has  always  been  customary  for  bank- 
ing officials  to  possess  great  power — in  fact,  an  arbitrary 

121 


122  CREDIT  AND  ITS  USES 

power — in  the  matter  of  loans  and  other  banking  business. 
All  important  questions  are  supposed  to  be  passed  upon 
by  boards  of  directors,  but  it  is  well  known  that  in  many 
institutions,  both  in  large  centers  and  in  rural  communi- 
ties, the  ipse  dixit  of  the  president  or  cashier  (whichever 
may  be  the  dominant  official  of  the  bank)  has  been  the 
determining  voice  in  most  important  matters.  These  offi- 
cials, therefore,  have  not  only  been  possessed  of  the  power 
to  which  reference  is  made,  but  they  have  carried  within 
their  own  minds  the  data  in  regard  to  loans  and  the  gen- 
eral relations  of  the  customers  with  the  bank.  The  pos- 
session of  this  information  has  made  them  even  more 
powerful  than  they  otherwise  would  have  been,  and  made 
their  continued  association  with  the  bank  in  some  cases 
imperative. 

In  the  measure  that  a  bank's  investments  are  sound  will 
be  determined  the  profits  or  dividends  of  the  bank  to  its 
stockholders  and  the  general  prosperity  of  the  institution. 
The  small  percentage  of  profit  pertaining  to  banking  trans- 
actions makes  the  responsibility  that  rests  upon  a  bank's 
officers  a  delicate  and  onerous  one.  Unwise  credits  (un- 
wise loans)  reflect  a  degree  of  loss  upon  the  bank  in  the 
same  sense  that  actual  peculation  does,  and  proper  means 
should  be  devised  for  the  correct  gaiidance  of  the  officials 
of  the  bank  in  determining  to  whom  its  funds  should  be 
lent.  A  failure  to  observe  the  duty  imposed  upon  the 
officials  of  a  bank  in  this  respect  is  an  absolute  breach 
of  the  faith  that  is  reposed  in  them  by  the  stockholders 
and  depositors  of  the  bank.  This  faith  consists  not  alone 
in  confidence  in  their  honesty  in  the  handling  of  funds, 
but  in  their  ability  to  so  manipulate  them  that  only  a 
minimum  of  loss  will  result. 


THE  CREDIT  DEPARTMENT  IN  BANKING  CREDIT    123 

Many  large  banks  act  as  an  investing  medium  for 
their  correspondent  country  banks.  The  latter  are,  in 
many  cases,  large  purchasers  of  commercial  paper,  and 
make  their  purchases  mainly  upon  the  representations  of 
the  bank  with  whom  they  are  doing  business.  How  can 
they  be  properly  advised  as  to  the  desirability  of  the 
paper  they  intend  to  purchase  unless  the  inquiries  into  the 
standing  and  responsibility  of  the  makers  and  indorsers 
of  that  paper  be  of  the  most  rigid  character  ?  Is  it  reason- 
able to  suppose  that  an  officer  of  the  advising  bank,  if  he 
be  depending  solely  upon  his  personal  impressions,  or  in- 
formation that  he  is  carrying  in  his  mind  (a  mind  over- 
charged in  these  busy  days  with  other  details  and  mat- 
ters), can  give  as  wholesome  advice  to  those  who  are 
seeking  it  as  if  he  had  before  him  thoroughly  prepared 
and  extensive  reports  drawn  from  reliable  and  useful  chan- 
nels of  information  ?  It  is  freely  conceded  that  no  amount 
of  system  and  no  amount  of  investigation  will  act  as  a 
complete  bar  to  losses.  There  is  no  question,  however, 
that  in  these  days  of  widely  diversified  interests,  the  more 
thorough  and  perfect  the  system  the  less  liability  there 
will  be  to  losses  and  misadventures. 

A  credit  department  should  represent  the  simplest  and 
most  effective  methods  for  acquiring  information,  all  rea- 
sonable utilities  for  making  the  range  of  information  as 
broad  as  possible,  the  compilation  in  presentable  form  of 
the  information  gathered,  an  entry  into  the  records  of 
that  department  of  every  iota  of  information  it  is  possible 
to  glean,  and  also  a  citation  of  such  personal  impressions 
as  the  officials  of  the  bank  may  from  time  to  time  enter- 
tain in  regard  to  the  desirdbiliiy  of  an  account.  An  inci- 
dent may  occur  in  the  relations  of  a  bank  with  a  borrower 


124  CREDIT  AND  ITS  USES 

to  -which  no  importance  may  be  ascribed  at  the  time,  but 
if  promptly  noted  upon  the  records  of  the  credit  depart- 
ment may  in  after  years,  if  considered  in  connection  with 
some  new  development,  have  a  very  decided  bearing  upon 
the  judgment  which  the  officer  will  then  form  as  to  the 
standing  of  an  applicant  for  credit. 

The  title  "  credit  man  "  is  applied  to  him  who  is  in 
charge  of  a  credit  department.  There  have  been  many 
word  pictures  painted  of  this  individual;  the  disposition 
has  generally  been  to  idealize  him — a  not  uncommendable 
motive,  but  one  which  should  not  be  tortured  into  im- 
posing upon  the  credit  man  the  possession  of  too  many 
virtues  or  an  extravagant  order  of  abilities.  The  best 
credit  man  is  the  practical  man ;  the  man  of  sufficient 
general  knowledge  to  be  able  to  quickly  appreciate  the 
cogency  of  any  statement  or  situation  that  may  be  pre- 
sented to  him ;  a  man  of  executive  capacity ;  a  man  who 
understands  the  necessity  of  and  does  not  shrink  from 
hard  work;  a  man  with  sympathy  for  his  fellow  beings, 
but  not  of  so  impressionable  a  nature  as  to  permit  his 
sympathies  to  unduly  influence  his  reason.  In  addition 
to  a  knowledge  of  commercial  affairs  and  methods,  it  is 
desirable  that  the  credit  man  of  a  bank  should  be  one 
who  is  familiar  with  the  different  departments  of  banking 
business. 

The  most  practical  manner  in  which  to  study  the  opera- 
tions of  a  credit  department  in  a  bank  is  to  follow  the 
treatment  and  course  of  an  account  through  its  different 
stages.  The  system  necessary  to  such  a  department  in- 
volves the  use  of  forms  without  which  it  would  be  impos- 
sible to  correctly  carry  into  effect  the  theory  of  this  branch 
of  the  bank's  work.     In  the  present  discussion  the  use  of 


THE  CREDIT  DEPARTMENT  IN  BANKING  CREDIT     125 

these  forms  will  aid  in  the  illustration  of  many  questions 
which  must  be  referred  to. 

It  is  assumed  that  a  person  presents  himself  at  a  bank 
and  expresses  a  desire  to  open  an  account  and  maintain 
regular  relations  with  it  as  a  depositor  and  borrower.  The 
officer  of  the  bank  who  interviews  him,  in  order  to  secure 
an  orderly  statement  of  certain  essential  information,  uses 
a  form  (Form  1)  upon  which  he  notes  the  answers  to  the 
questions. 

This  form  is  entitled  "  Account  Opened,"  and  marks 
the  foundation  of  the  data  which  goes  into  the  records 
of  the  credit  department.  The  first  line  contains  spaces 
in  which  the  fact  of  the  account  being  opened  is  noted  by 
the  different  departments.  The  other  items  on  the  form 
are  all  of  a  basic  nature,  involving  nothing  of  a  technical 
character.  When  this  form  is  being  used  by  the  bank 
officer  in  the  presence  of  the  person  who  is  opening  the 
account,  it  is  folded  inward  at  the  last  line  extending 
across  the  page.  The  reason  is  that  the  printed  matter 
below  refers  entirely  to  questions  which  the  bank  does  not 
deem  it  necessary  to  display  before  the  customer.  The 
latter  must  be  aware,  if  he  be  a  well-informed  person, 
that  sooner  or  later  he  will  be  asked  for  a  statement  of 
his  affairs,  that  letters  of  inquiry  will  be  issued  regarding 
him,  and  that  reports  will  be  asked  from  tlie  agencies  in 
order  to  ascertain  what  his  standing  may  be.  It  is  pre- 
sumed that  the  account  is  to  be  a  continuous  and  active 
one.  The  bank  should  secure,  as  early  as  possible,  a  thor- 
ough statement  from  the  customer,  showing  all  essential 
details  of  his  business,  that  there  may  be  such  knowledge 
in  hand  regarding  him  as  will  enable  the  bank  to  deal 
justly  with  him  as  well  as  with  its  own  interests.     A 


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THE  CREDIT  DEPARTMENT  IN  BANKING  CREDIT    127 

man's  first  offering  of  collateral  may  be  an  excellent  one, 
precluding  (some  may  imagine)  the  necessity  of  anything 
more  than  the  most  general  knowledge  of  his  standing. 
The  next  time  he  asks  permission  to  borrow  he  may  not 
be  able  to  furnish  as  favorable  security,  yet  expects,  as 
many  do,  and  succeed  in  doing,  to  trade  upon  the  good 
impressions  created  by  his  first  borrowing  transaction. 
The  effective  way  to  guard  against  the  subtle  influences 
of  these  impressions  is  to  have  a  thorough  understanding 
in  the  very  beginning,  and  secure  at  that  time  the  informa- 
tion which  will  guide  aright  at  any  stage  of  the  account. 
Some  banks  ask  for  a  statement  of  affairs  before  accepting 
an  account.  It  is  entirely  proper  to  do  this,  for  it  is  not 
to  the  credit  of  any  bank  to  have  undesirable  names  upon 
its  books.  The  avidity  with  which  accounts  are  sought 
and  accepted  in  these  days  need  not  be  regarded  as  ira 
pairing  the  practical  soundness  of  this  opinion. 

The  policy  of  asking  for  and  insisting  upon  statement, 
being  furnished  is  only  of  comparatively  recent  origin.. 
Some  banks  have  followed  such  a  policy  for  many  years 
but  it  was  not  until  the  American  Bankers'  Association 
and  the  associations  of  State  bankers  gave  to  the  subjocv 
their  indorsement,  and  many  of  the  State  organizations 
adopted  forms  of  statements,  that  individual  banks  would 
admit  the  wisdom  of  such  a  policy.  It  is  a  fact  that 
banks  have  in  the  past  refrained  from  asking  their  cus- 
tomers for  statements,  hoping  to  create  in  the  minds  of 
those  customers  the  impression  that  this  particular  bank 
■was  a  very  liberal  one,  and  did  not  intend  to  fetter  itself 
or  bother  its  customers  w'ith  technicalities.  It  will  be 
asked  how  such  a  bank  could  properly  fortify  itself  with 
information  upon  which  to  make  its  loans.     It  would  se- 


128  CREDIT  AND   ITS  USES 

cure  such  information  as  it  could,  in  the  shape  of  written 
references  and  agency  reports,  depending  upon  the  state- 
ment given  by  the  customer  to  the  agencies.  This  state- 
ment was  in  most  cases  months  old,  and  also,  in  m^st 
cases,  unsigned,  so  that  it  will  be  evident  that  a  bank 
conducting  its  credit  business  in  this  manner  was  standing 
upon  unsafe  ground.  At  one  period  of  our  commercial 
and  banking  history  many  traders  regarded  it  as  an  un- 
warrantable infringement  of  their  private  rights  to  be 
asked  to  make  out  a  statement  on  the  forms  prescribed 
by  banks  and  business  houses,  but  numerous  causes  have 
contributed  to  dissipate  this  feeling. 

In  an  address  on  "  Business  Education  and  Commer- 
cial Banking  Methods,"  by  Mr.  Henry  Clews,  of  New 
York,  read  before  the  Sixteenth  Annual  Convention  of  the 
Minnesota  Bankers'  Association  (June  20-21,  1905),  he 
says: 

"The  man  who  would  get  credit  must  fill  out  forms  which  fur- 
nish in  more  or  less  detail,  according  to  the  circumstances,  the  data 
which  will  enable  the  bank  to  judge  of  his  business.  In  the  modern 
financial  institution  the  '  credit  department '  has  become  the  regu- 
ator  of  the  whole  mechanism.  Some  consider  the  present  require- 
ments of  full  statements  and  appraisement  unreasonable.  There 
has  probably  never  been  a  change  or  forward  step  in  business 
practice  that  was  not  so  considered  by  some  of  the  persons  affected 
by  it.  Yet  no  change  in  our  banking  methods  can  be  more  con- 
spicuously justified  than  this.  It  has  long  been  in  vogue  in  for- 
eign countries  where  banking  is  more  nearly  a  profession  than  a 
business." 

The  bank  asks  the  customer  for  a  statement  of  his  affairs, 
and  furnishes  a  form  (Form  2)  for  him  to  fill  out  and 
sign. 


THE  CREDIT  DEPARTMENT  IN  BANKING  CREDIT    129 

It  being  assumed  that  the  relations  upon  which  the 
customer  is  entering  with  the  bank  are  to  be  of  long 
duration  (at  least  that  is  the  business  supposition  in  ref- 
erence to  most  accounts),  the  bank  is  justified  in  asking 
at  the  outset  for  all  the  information  it  believes  it  should 
possess.  A  statement  such  as  that  submitted  in  Form  2 
would  have  been  regarded  some  thirty  years  ago  as  calling 
for  details  that  were  essentially  the  private  affairs  of  the 
customer,  and  into  which  no  one  had  the  right  to  inquire. 
The  questions  set  forth  in  this  statement,  however,  cover 
such  facts  as  it  is  necessary  the  bank  should  examine  into, 
and  an  omission  so  to  do  is  attributable  to  poor  business 
methods. 

Notes  receivable  and  accounts  receivable  are  only  to 
be  enumerated  so  far  as  they  are  in  the  actual  possession 
and  are  the  property  of  the  person  making  the  statement. 
This  qualification  is  necessary,  for  there  are  people  who, 
even  after  they  have  transferred  notes  receivable  or  ac- 
counts receivable  as  collateral,  believe  that  these  notes  and 
accounts  are  still  their  exclusive  property,  and  in  esti- 
mating their  worth  are  at  perfect  liberty  to  compute  these 
items  as  full  assets. 

The  item  of  merchandise  is  also  divided  into  three 
classes — "  finished,"  "  unfinished,"  and  "  raw  material  " 
— and  the  means  employed  for  determining  its  value  must 
be  stated.  It  is  essential  that  this  differentiation  should 
be  made,  as  the  relative  amounts  of  the  respective  classes  ' 
of  merchandise  may  have  a  vital  bearing  upon  the  general 
results  of  a  statement.  A  concern  with  a  large  amount 
of  unmarketable  raw  material  on  hand  may,  because  of 
this  fact,  be  at  a  considerable  disadvantage.  Unless,  there- 
fore, the  different  classes  of  merchandise  are  explained  in 


130  CREDIT    AND  ITS  USES 

detail,  the  credit  man  might,  and  probably  would,  contract 
an  erroneous  opinion  as  to  the  value  of  the  merchandise 
held.  It  is  required  in  this  statement  that  it  be  specified 
whether  the  items  of  land,  buildings,  and  machinery  are 
owned  by  the  firm  and  used  for  the  business.  This  is  a 
wise  provision,  for  very  often  people  will  list  property,  in 
which  they  may  have  a  party  or  family  interest,  in  a 
statement  of  their  firm's  assets. 

In  the  liabilities  column  there  are  three  classes  of 
notes  payable — those  "  given  for  merchandise,"  "  negoti- 
ated to  banks,"  or  "  otherwise  disposed  of."  A  division 
of  this  character,  instead  of  a  single  entry  of  notes  pay- 
able, enables  the  credit  man  to  get  a  much  clearer  idea 
as  to  the  nature  of  a  firm's  liabilities  and  also  its  credit 
standing  in  financial  and  commercial  circles.  This  sub- 
division also  assists  in  determining  whether  a  firm  is  un- 
duly "  spreading  "  its  credit. 

In  the  list  of  general  questions,  that  of  insurance  occu- 
pies a  prominent  place.  In  every  large  business  in  these 
days,  insurance  to  an  adequate  extent  is  usually  carried. 
With  small  concerns  this  is  not  the  case.  It  would  be 
well  if,  in  dealing  with  small  firms  or  corporations,  bank- 
ers would  insist  upon  the  question  of  insurance  being 
fully  respected. 

The  items  of  "  business  and  results,"  "  annual  sales," 
"  gross  profits  on  sales,"  "  expense  of  conducting  busi- 
ness," "  net  profit,"  "  other  income,"  and  "  combined 
profit "  are  all  of  the  most  important  character,  and  the 
entries  shown  against  these  items  will  indicate  in  a  special 
way  the  exact  trend  of  the  business — whether  toward 
progress  or  whether  it  be  losing  ground. 

Withdrawals  by  partners  is  a  matter  that  should  be 


To  THE  FIRST  NATIONAL  BANK  OF  CHICAGO. 

Firm  Name    -        - —     Location 

Business -     Branches.  II  any.— 

For  the  purpose  of  procuring  credit,  from  time  to  time,  with  the  above  bank  lor  our  negotiable  paper.  < 
otherwise,  we  furnish  the  following  as  being  a  lair  and  accurate  statement  of  our  llnancial  condition  ( 


^^T5. 

LIABILITIES 



— 

BUU  Payable  for  Borrowed  Money     | 
Deposlla  ol  Moneye  with  Ul 

°||P-^'-^:'^=' 

'-■- 

— 

— - 

Sl.=k,..d  8.nd,.  LBW    1 

|[             -^         --^ 

Sleeka  .,d  Bond..  L,e«    

1 

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Nel  Wor,l,.._. 

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II 

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To,.. 

Tola, 



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Q 


THE  CREDIT  DEPARTMENT  IN  BANKING  CREDIT    131 

carefully  studied  in  analyzing  a  statement.  The  witk- 
drawals  will  indicate  whether  the  partners  are  living 
within  the  means  of  the  business  or  whether  they  are 
going  beyond  what  is  reasonable  for  their  individual 
purposes. 

It  is  necessary,  in  examining  a  statement,  especially 
one  made  by  a  concern  that  does  a  large  credit  business, 
to  understand  exactly  what  its  loss  through  bad  debts 
has  been  for  a  stated  period.  This  will  show  whether 
the  firm  be  careful  or  imprudent  in  the  extension  of  its 
credits;  if  the  latter,  it  is  an  undoubted  danger  signal, 
and  failure  to  respect  it  will  result  in  trouble,  both  for 
the  concern  itself  and  those  who  do  business  with  it, 
whether  in  the  form  of  financial  or  merchandise  accom- 
modation. 

It  is  also  advisable  that  a  bank  should  know  with  what 
other  banks  its  customers  are  doing  business.  It  might 
develop  that  a  house  was  carrying  a  large  indebtedness 
with  several  different  banks  and  securing  accommodation 
beyond  its  deserts.  An  investigation  of  its  accounts  with 
other  banks  will  reveal  the  safety  or  unreliability  of  the 
account,  and  such  investigations  are  the  outgrowth  of  the 
questions  asked  as  in  statement  form,  Form  2.  Thorough 
attention  to  this  character  of  investigation  will  in  the 
end  result  in  minimizing  to  a  very  great  extent  the  losses 
incurred  by  banks. 

The  terms  on  which  the  bank's  customer  sells  his  goods, 
the  terms  on  which  he  buys,  the  time  of  year  when  his 
receivables  are  maximum  and  minimum,  when  his  mer- 
chandise is  maximum  and  minimum,  and  liabilities  are 
maximimi  and  minimum,  all  indicate  at  what  periods  the 
concern  will  be  most  likely  to  require  help  from  its  banks. 


132  CREDIT   AND   ITS   USES 

Knowledge  on  these  points  will  enable  the  bank  to  decide 
as  to  the  propriety  of  an  application  for  a  loan.  As  an 
example:  if  a  customer  were  to  ask  for  a  large  loan  at 
a  time  of  the  year  when,  according  to  his  own  admission  in 
a  statement  which  he  had  given  the  bank,  his  ready  re- 
sources should  be  the  largest,  it  would  indicate  a  condition 
requiring  prompt  attention  on  the  part  of  the  bank  if  he 
were  already  a  creditor;  or  otherwise,  as  to  the  wisdom 
of  making  the  loan  requested. 

The  last  question  on  this  statement  to  which  reference 
will  be  made  has  only  recently  come  to  be  regarded  as 
a  living  issue  in  credit  economy,  viz.,  verification  as  to 
whether  the  books  have  been  audited  by  a  certified  public 
accountant.  The  failure  to  have  a  concern's  books  exam- 
ined at  stated  periods  has  frequently  permitted  the 
growth  of  unwise  practices.  The  fact  of  no  examination 
of  the  books  being  made  by  an  outside  and  thoroughly 
impartial  person  has  left  them  absolutely  under  the  con- 
trol of  those  who  may  be  either  not  entirely  competent 
or  inclined  to  dishonesty.  It  is  a  matter  of  frequent 
occurrence  that  a  firm  will  discover  after  many  years  that 
a  trusted  employee  has  been  defrauding  it  through  pecu- 
lation. The  latter  condition  would  undoubtedly  have  been 
revealed  if  the  books  had  been  examined  at  regular  inter- 
vals by  competent  accountants.  It  is  a  healthy  sign  that 
banks  have  determined  to  ask  and  insist  upon  such  ex- 
aminations. This  policy  will  have  the  effect  of  eradi- 
cating irregular  methods  and  greater  evils.  Another  bene- 
ficial effect  will  be  the  education  of  the  business  public 
as  to  the  necessity  for  these  examinations,  which  should 
be  a  matter  of  frequent  and  orderly  procedure. 

As  a  specimen  of  a  simpler  form  of  statement  than 


\y 


Form  4, — Property  Statement  Furm  fhr  osi 


c 


THE  CREDIT  DEPARTMENT   IN   BANKING  CREDIT     133 

that  just  described,  references  should  be  made  to 
Form  3. 

The  foregoing  statement  forms  are  those  for  use  by 
firms.  The  corporation  has  become  a  commercial  entity, 
and  forms  adaptable  to  corporation  organization  and 
mechanism  also  have  to  be  used.  Different  types  of  these 
forms  are  shown  in  Forms  4  and  5. 

Considerable  credit  information  is  obtained  by  banks 
through  means  of  correspondence.  The  very  nature  of  a 
bank's  business  and  its  standing  in  the  community  en- 
able it  to  request  sucli  information  with  the  assurance 
that  it  will  receive  prompt,  courteous,  and  thorough  at- 
tention. With  this  in  view  letters,  very  often  of  a  gen- 
eral character,  unless  there  be  some  special  question  it  is 
necessary  to  ask,  are  addressed  to  business  houses,  and 
also  to  banks.  A  type  of  letter  which  is  used  for  securing 
information  from  business  houses  is  here  given  (Form  6), 
and  another  type  used  for  correspondence  with  banks  is 
shown  in  Form  7. 

These  letters  do  not  call  for  any  extended  analysis  or 
criticism,  as  they  are  simply  statements  of  what  is  desired. 

Banking  credit  departments  also  avail  themselves  of 
other  well-known  opportunities  for  acquiring  credit  infor- 
mation, but  as  the  latter  will  be  made  the  subject  of  a 
special  study  as  this  work  proceeds,  it  is  not  necessary 
to  make  further  reference  to  them  at  this  time. 

Having  secured  such  information  as  it  was  possible 

to  obtain,  the  credit  department  must  express  its  opinion 

as  to  the  propriety  of  making  the  loan  applied  for.    While 

only  one  character  of  loan  has  so  far  been  referred  to, 

the  same  methods  of  investigation  would  be  applied  to 

any  other  class  of  loan,  whether  one  represented  by  single- 
10 


134  CREDIT   AND  ITS  USES 

name  paper  without  collateral  or  paper  carrying  an  in- 
dorser  or  indorsers  and  with  or  without  collateral.  There 
are  certain  loans,  particularly  call  loans,  which  are  covered 
by  what  is  supposed  to  be  the  liveliest  kind  of  collateral. 
These  are  sometimes  handled  in  a  loan  department,  and 
do  not  come  before  the  credit  department,  the  reason  being 
that  loans  of  this  character  are  covered  by  collateral  of 
such  well-known  market  value  that  the  loan  is  made  really 
upon  the  collateral,  with  little  respect  to  the  person  or 
persons  making  the  note. 

The  businesslike  character  of  a  statement  of  a  per- 
son's affairs  when  placed  in  the  hands  of  the  credit  man 
or  a  bank  official  cannot  fail  to  make  a  favorable  impres- 
sion upon  him.  A  statement  prepared  with  a  great  deal 
of  care  and  in  which  every  effort  seems  to  have  been 
made  to  answer  all  questions  fully,  will  create  a  better 
impression  than  one  prepared  in  a  slovenly  manner,  par- 
ticularly where  any  disposition,  even  the  slightest,  has  been 
shown  to  withhold  information.  It  has  been  remarked 
on  this  point  that 

"Failure  or  inability  to  make  out  a  statement  form  correctly 
indicates  poor  business  capacity  or  careless  methods  of  book- 
keeping." 

Writers  on  banking  credits  agree  that  the  character 
and  ability  of  the  person  or  persons  making  the  statement, 
or  the  character  and  ability  of  those  who  are  directing 
the  organization,  as  of  a  corporation,  have  a  vital  and, 
some  hold,  a  determining  influence  upon  the  acceptability 
of  an  account  for  loan  purposes.  It  is  intended  to  discuss 
these  characteristics  in  detail  as  we  proceed. 

It  is  a  matter  of  general  supposition  that  people  doing 


'    1    \ 
j     1 


(O  •— 


•£     S 


To  THE  FIRST  NATIONAL  BANK  OF  CHICAGO; 

Name  {Corporate  style  under  charter) 

Business ~. 

Location  .- _ Branches -^■. -.. . 

For  the  purpose  of  procuring  credit,  from  time  to  time,  with  the  above  bank  for  < 
or  otherwise,  we  furnish  the  following  as  being  a  fair  and  accurate  statement  of  ou 
on  the    - day  of„_^ „ 190  _ 


jr  negotiable  paper, 
financial  condition 


ASSETS 

LIABILITIES 

Cw 

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T..I 

FcLM  5. — PiioPEiiTv  Statement  Form  i 


n 


saox3HUia 


SU33IddO 


w 

Pi 

o 

H 

m 


We  are  seeking  as  close  information  as  possible 
relative  to  the  character,  credit  standing,  and  financial 
responsibility  of 


and  presuming  that  you  are  in  a  position  to  advise  us  as 
to  the  manner  in  which  they  meet  their  business  engage- 
ments— whether  they  avail  themselves  of  the  best  dis- 
counts offered,  etc. — we  write  to  ask  if  you  will  have  the 
kindness  to  render  us  such  service  in  the  premises  as 
may  be  within  your  reach.  We  shall  appreciate  any 
details  you  may  be  able  to  give  us,  respecting  their  affairs 
and  methods,  that  will  be  of  value  in  guiding  us  to  a 
correct  conclusion  as  to  their  desirability  as  a  credit  risk. 
Tendering  you  our  best  thanks  in  advance  for  your 
courtesy,  and  assuring  you  that  whatever  you  may 
say  to  us  in  this  connection  will  be  treated  as  confiden- 
tial, we  are, 

Very  respectfully  yours, 


Form  6. — General  form  of  inquiry  letter. 


We  are  desirous  of  securing  as  close  information 
as  possible  relative  to  the  character,  credit  standing, 
and  financial  responsibility  of 


and  understanding  that  they  have  an  account  with  you, 
we  beg  to  ask  if  their  business  is  handled  in  a  correct 
and  satisfactory  manner.  Is  your  confidence  in  them 
such  that  you  are  willing  to  extend  them  a  liberal  line 
of  accommodation?  We  shall  appreciate  any  informa- 
tion you  may  be  able  to  give  us  that  will  prove  of  assist- 
ance in  guiding  us  to  a  correct  conclusion  as  to  their 
desirability  as  a  credit  risk. 

Tendering  you  our  best  thanks  in  advance  for  the 
courtesy  of  a  reply  at  your  convenience,  and  assuring 
you  that  we  shall  be  only  too  happy  to  reciprocate  in  a 
pimilflr  way  at  any  time,  we  are. 

Very  respectfully  yours, 


Form  7.— ^ener.vl  form  of  inquiry  letter  addressed  to  banks. 


■  iS  •  "  s-^  a  Hs  i:^-§  ; 


"  3  ?  ?  S  IS 


I  3^     §  i  s-S 


J    :■«    2    s. 


O   8 


-<  i 

33  I 


r    IS  -  :  §    '-I 


o 


In  consideration  of  the  making,  at  the  request  of  the  undersigned,  of 
the  loan  evidenced  by  the  within  note  upon  the  terms  thereof,  and  of  the 
sum  of  one  dollar,  the  undersigned  hereby  guarantee  to  The  Fourth 
National  Bank  of  the  City  ok  New  York,  its  successors,  indorsees 
or  assigns,  the  prompt  payment  of  the  said  loan  when  due,  and  hereby 
consent  that  the  securities  for  the  said  loan  may  be  exchanged  or  sur- 
rendered from  time  to  time,  or  the  time  of  payment  of  the  said  loan  or  of 
any  of  the  securities  therefor  extended,  without  notice  to  or  further  assent 
from  the  undersigned,  and  that  the  undersigned  will  remain  bound  upon 
this  guarantee  notwithstanding  such  changes,  surrender  or  extension.  The 
undersigned  waive  demand  of  payment  from  the  maker  of  said  note,  and 
also  waive  notice  of  non-payment  of  the  said  loan  or  note,  and  also  waive 
notice  of  any  sale  of  the  collateral  securities  held  for  the  said  note. 


THE  CREDIT  DEPARTMENT  IN  BANKING  CREDIT    137 

business  with  banks  are  entitled  to  a  certain  defined  limit 
of  accommodation  based  upon  their  average  balances;  and 
that  failure  to  accord  them  such  accommodation  arises 
from  lack  of  friendship  on  the  part  of  the  bank  or  a 
system  of  favoritism  toward  other  customers  which  preju- 
dices the  bank's  ability  to  lend  its  money  among  all  its 
customers  in  ratable  proportion.  Opinions  expressed  by 
bank  officials  on  this  point  are  on  the  order  of  the  fol- 
lowing : 

"Bank  credits  should  be  granted  to  the  customers  of  a  bank 
according  to  their  balances  and  responsibility." 

"The  value  of  a  bank  account  is  largely  determined  by  the 
net  average  balance  which  it  carries." 

"The  average  balance  should  be  a  determining  factor  as  to 
credit  extended." 

The  foregoing  are  in  accordance  with  what  would  be 
regarded  as  a  safe  and  just  policy  for  a  bank  to  pursue 
toward  its  customers,  and  undoubtedly  these  are  the  ideas 
upon  which  most  bank  officials  believe  that  loans  should 
be  regulated.  It  is  evident  that  this  policy  is  respected 
as  much  in  the  breach  as  in  the  observance.  In  an  in- 
vestigation made  by  an  officer  of  a  prominent  New  York 
bank  some  years  ago  as  to  the  plan  or  basis  upon  which 
discount  lines  were  determined,  it  developed  that  there 
was  no  uniform  system,  the  larger  number  of  banks  re- 
porting that  they  had  no  definite  method  for  basing  dis- 
count lines  as  proportioned  to  balances.  Some  ,men  man- 
age, by  what  exact  means  it  is  impossible  to  determine, 
to  ingratiate  themselves  into  the  favor  of  banks  and  se- 
cure accommodation  entirely  out  of  proportion  to  their 
responsibility.     It  is  not  necessary  to  quote  any  living 


138  CREDIT  AND  ITS   USES 

examples  of  this  practice.  The  liabilities  due  to  banks 
in  failures  occurring  daily,  prove  the  absolute  verity  of 
the  statement.  This  condition  should  be  the  subject 
of    corrective    measures.      Where    favoritism    is    shown 


We  are  making  the  customary  revision  of  our  files 
on 

and  would  appreciate  your  present  opinion  of  their 
financial  responsibility,  management,  etc.  Has  there 
been  any  change  in  your  estimate  of  their  credit  stand- 
ing since  your  former  letter  to  us,  dated, 

Thanking  you  in  advance  for  a  reply  at  your  con- 
venience, and  assuring  you  of  our  desire  to  render  you 
reciprocal  services,  we  are, 

Very  respectfully  yours. 


Form  9. — Form  of  letter  xtsed  by  baxks  when  making  eevisions 

OF   CREDIT   information. 


c 

c 

B 
B 

A 
A 
M 
M 


FIRMS 

THE  FOURTH   NATIONAL  BANK 


OF  THE  CITY  OF  NEW  VORK 

COMPARISON    OF    STATE3IENTS 


s  KeceivAblc.  all  good 


BUh  and  AtiOHiiti  RKtlxabtt  dut  from  ParlHtrt..^. 
Accounts  Receivable,  all  good,  due  from  Customers.., 

Atcounli  and  Sills  RuehahU,  deubtful..;. 

McTctundise  (at  actual  present  cash  value) 


BitU  PayabU  for  Merehandt 
Bills  Payable  negotiated  to  ov 
Bills  Payable  olherM-ise  dispos 

Open  Accounts,  not  due 

OptnA«eunt>.pa,t,<.. 
Deposits  of  .Money  ^  ■ 


TOTAL  QUICK  ASSETS... 
LIABILITIES _.„. 


EXCESS— QUICK... 


w 


SALES „ 

Form  10.— Comparative  St  i 


:> 


c 


THE  CREDIT  DEPARTMENT  IN  BANKING  CREDIT    139 

in  the  dispensation  of  bank  credits,  it  is  invariably  a 
deserving  element  of  the  public  that  is  discriminated 
against. 

When  it  is  determined  to  make  a  loan  on  collateral, 
it  is  usually  desired  that  the  customer  shall  use  one  of 
the  bank's  forms  of  notes  in  executing  the  evidence  of 
indebtedness  about  to  be  contracted.  The  general  form 
of  these  notes  is  as  shown  in  Form  8, 

These  notes  are  of  different  forms,  time  or  demand. 
The  body  of  the  notes  must  be  drawn  with  a  great  deal 
of  care  in  order  that  the  interests  of  the  bank  in  making 
the  loan  may  be  fully  safeguarded  and  that  its  right  to 
demand  additional  margin  and  proceed  to  recover  under 
the  note  and  dispose  of  the  collateral  deposited  on  account 
of  the  loan  will  be  entirely  clear  and  in  accordance  with 
the  statutes  of  each  particular  State. 

The  work  of  a  credit  department  carries  with  it  the 
responsibility  of  making  revisions  of  the  bank's  credit 
reports  at  stated  periods.  The  great  advantage  of  these 
revisions  lies  in  the  fact  that  the  credit  department 
making  them  is  enabled  to  keep  abreast  of  any  changes 
which  may  develop  in  a  concern's  standing,  and  when  a 
question  arises  in  regard  to  an  account,  the  information  is 
in  hand,  and  it  is  not  necessary  to  delay  matters  while 
a  new  investigation  is  entered  upon.  In  Form  9  is  given 
a  form  of  letter  employed  when  making  revisions  of  re- 
ports, which  sets  forth  briefly  the  idea  that  it  is  for  pur- 
poses of  revision  that  the  information  is  being  requested. 
It  also  calls  attention  to  the  last  report  issued  hj  the  corre- 
spondent, thus  suggesting  a  checking  of  his  own  files,  and 
prompting  him  to  give  the  account  such  notice  as  might 
not  otherwise  be  extended  to  it. 


140  CREDIT  AND  ITS  USES 

Banking  credit  departments,  a3  also  credit  departments 
of  large  business  establishments,  make  it  a  practice  to 
request  from  those  with  whom  they  are  doing  an  active 
business  a  statement  of  the  concern's  affairs  at  least  once 
a  year,  and,  if  necessity  should  arise,  a  statement  showing 
the  results  of  the  business  every  six  months.  In  order 
that  the  gist  of  these  statements  may  be  kept  before  the 
credit  man  in  epitomized  form,  it  is  customary  to  include 
among  the  records  of  each  person  a  comparative  statement, 
as  shown  in  Form  10. 

The  figures  appearing  in  this  comparative  statement, 
or  "  comparison  of  statements,"  are  transcribed  from  the 
original  statements  by  a  clerk  in  the  credit  department. 
The  questions  entered  in  the  comparative  statement  con- 
stitute the  essential  items  of  a  statement  form.  It  will 
be  observed  that  the  comparative-statement  form  is  so 
arranged  that  there  may  be  entered  upon  it  the  figures 
covering  the  standing  of  a  concern  as  shown  in  its  state- 
ments for  a  number  of  years.  There  may  be  as  many 
columns  (indicating  years)  as  the  person  using  the  form 
chooses  to  employ.  The  figures  entered  are  subject  to 
ready  consideration,  and  will  show,  as  the  eye  glances 
across  the  page,  whether  the  firm  has  been  making  or  los- 
ing money.  Comparative-statement  forms  are  also  used 
for  corporations,  the  only  changes  necessary  being  to  in- 
clude questions  that  do  not  affect  copartnerskips,  but  enter 
into  corporate  organization. 

The  customers  of  a  bank  consist  of  those  in  commercial, 
professional,  and  private  life,  and  banks  as  well. 

"  The  same  reasons  which  make  it  desirable  for  a  private  person 
to  keep  a  banker,  make  it  also  desirable  for  every  banker,  as 
respects  his  reserve,  to  bank  with  another  banker,  if  he  safely 


TO  THE  FOURTH  NATIONAL  BANK  OF  THE  CITY  OF  NEW  YORK. 

For  the  purpose  of  procuring  credit  from  linu  to  time  from  you/or  our  negaliabU  paper  or  otherwise, 
■toith  the  following  statement  and  information  wbicb  fully  and  tndy  set  forth  our  fimmial  condition  on  the 
dayof ,    ■    .        '9  ■ 

In  consideration  of  fi'f  "'^■•''-' ■'•''•'''•  ^''■'1''  '"■'  ■''■•■■■••  "'■ 
commit  an  act  of  bankrup/y 
our  obligations  iteld  by  you 
against  the  balance  of  any  .'..- 
account  from  time  to  tim£  t.v;...,.^  ■'-  —  -..'...,  '  .. 


any  time  stop  payment  or  become  insolvent,  or 
•e  to  be  untrue,  then  and  in  either  such  case  all 
demand  or  notice,  and  the  same  may  be  charged 
ga  continuing  Hen  upon  such  balance  of  deposit 


ASS^ 

l«B,UT,t.^ 

BU.D.>c.»,e. 

' 

c,irii4i  si.^ck 

^r^^nr^'r""'::::: 

O     rd    fl     Sec      d 

Dividends  Unpiid 

Due  to  Approved  Reserve  Aeetiis 

In  J.  Deposits  Subject  to  Check      

Time  Certificates  of  Deposit  ....     

Demuid  Certifiatei  of  Dcposii 

Overdrilts,  Unsecured              - 

{(Hrviluel,             P'll'c"!?        ■/ " 

-'•*^"-'' 

ITuI^'b!!^.'!!^^..^.^,-.  . .      1' ... 

»::':::l  ».,».».,„:: 

E;(Chinges  (or  dealing  House—,. ,  

Certilicates  of  Deposit  representing  i 

Money  Borrowed  I. 1)               i  ' 

- 

THE  CREDIT  DEPARTMENT  IN  BANKING  CREDIT    141 

can.  The  custody  of  very  large  sums  in  solid  cash  entails  much 
care,  and  some  cost;  everyone  \\dshes  to  shift  these  upon  others 
if  he  can  do  so  without  suffering." 


There  are  times  when  banks  must  secure  loans  in  the 
same  sense  as  others  find  it  necessary  to  do  so,  and  in 
extending  accommodation  a  bank's  standing  and  re- 
sponsibility must  be  considered  just  as  rigorously  as  the 
application  for  accommodation  from  a  private  person. 
Statements  from  such  banks  are  insisted  upon,  and  general 
investigations  are  also  made  where  banks  may  be  acting  as 
a  collecting  medium.  A  form  of  statement  so  used  is 
shown  in  Form  11. 

The  items  of  this  statement  vary  from  the  items  shoMTi 
on  a  statement  which  has  to  be  given  by  a  commercial 
house,  as  the  general  character  of  banking  business  differs 
from  commercial  business.  The  principles  involved  in  the 
statements  are  exactly  the  same,  the  purpose  being  to  secure 
complete  data  affecting  every  branch  of  a  bank's  business. 
In  Form  12  v  ill  be  found  a  form  of  statement  for  banks 
which  is  also  used,  and  it  will  be  noticed  that  it  is  an  abbre- 
viation of  the  form  shown  in  Form  11. 

The  difference  in  these  two  forms  of  statement  illus- 
trates the  difference  in  the  methods  of  certain  institutions. 
In  some  the  policy  is  to  exact  all  the  information  that  from 
the  most  technical  standpoint  would  be  demanded,  while 
in  others  the  desire  seems  to  be  to  simply  secure  informa- 
tion regarding  the  most  important  features  of  a  bank's 
assets  and  liabilities.  When  a  bank  desires  to  secure  a 
loan,  it  submits  as  security  for  such  loan  a  list  of  notes 
it  holds  made  by  its  customers,  which  list  is  copied  upon 
a  form  (Form  13). 


142  CREDIT  AND   ITS   USES 

This  form  is  a  very  simple  one.  It  contains  the  name 
of  the  proposed  borrower  and  the  address;  in  the  column 
"  Makers  and  Indorsers,"  the  names  of  the  people  appear- 
ing upon  the  notes  to  be  furnished  as  collateral,  their  ad- 
dresses, the  due  dates  of  the  notes,  and  the  amounts  of 
them.  On  the  left-hand  margin  there  is  a  very  important 
column ;  in  it  the  clerks  in  the  credit  department  enter  the 
ratings  (from  the  Mercantile  Agency  records)  of  the  people 
whose  notes  are  offered  as  collateral ;  a  glance  at  these  rat- 
ings will  satisfy  the  credit  man  as  to  the  approximate 
standing  of  these  persons,  the  desirability  of  the  collateral, 
and  the  class  of  traders  with  whom  the  bank's  customer 
is  doing  business.  In  the  chapter  on  commercial  credit 
the  nature  of  such  collateral  and  its  relative  acceptability 
were  discussed  at  length,  and  it  is  unnecessary  to  repeat 
the  very  favorable  opinion  expressed  in  regard  to  such 
bankable  paper. 

Revision  of  the  information  regarding  banks  is  nec- 
essarily resorted  to,  and  a  form  of  letter  used  is  shown  in 
Form  14. 

Comparative  statements  are  also  utilized  in  compiling 
information  in  regard  to  banks,  the  ideas  involved  being 
those  explained  in  the  comparative  statement  already 
described. 

It  develops  from  time  to  time  that  where  a  concern  may 
be  carrying  a  loan  with  its  bank,  it  will  find  it  necessary 
to  ask  for  further  accommodation.  In  order  that  the  offi- 
cial who  will  pass  upon  the  application  may  have  before 
him  the  facts  in  regard  to  the  standing  of  the  account,  a 
form  such  as  shown  in  Form  15  (or  others  very  similar 
thereto)  is  used. 


C13 

To  The 

FIRST  NATIONAL  BANK 

OF  CHICAGO. 


OFFICE  OF 


tT'CNtnu  o(  Buk  or   Firm). 


Below  please  find  statement  of  financial  condition  as  slwwn  by books  on 

18  This  is  furnished  in  confidence  for  your 


:tse  alone,    and  as  a   guide  should  tJie    questioyi  of^ 
itself  in  tJie  course  of  our  affairs  with  your  bank. 


^standing  and  responsibility  present 


Respectfully, 


ASSETS. 

Loans  and  DiEConnts, 

U.  S.  Bonds. 

Other     '• 

Cash  on  Hand, 

Due  from  Banks  and  Bankers, 

Real  Estate, 

Other  Assets, 


LIABILITIES. 

Capital, 

Undivided  Profits. 
Deposits  Demand. 
Time  Certificates, 
Bills  Payable 
Other  Liabilities. 


In  cases  of  unincorporated  institutions,  please  give  below  amounts  of  assets  and  liabilities 
Of  individual  members  of  the  firm,  in  addition  to  above. 


Form  12. — A  briefer  form  used  by  a  bank  in  making  a  statement  of  its  affairs. 


BILLS  RECEIVABLE 


Rating 


Makers  and  Indorskrs 


Location 


Due 
Date 


Amount 


Form   13. — Form  used  by   a  banking  crkdit  dkpartment  for 
listing  bills  receivable  offered  as  collateital. 


In  making  the  customary  revision  of  the  informa- 
tion on  our  files  relative  to  the  banks  to  which  we  send 
our  collections,  we  have  observed  that  your  institution 
is  reported  as  having  the  account  of  the 


and  we  are,  therefore,  prompted  to  ask  if  you  will 
kindly  favor  us  with  your  opinion  of  the  standing,  con- 
dition, and  management  of  the  bank  in  question,  as 
well  as  furnish  us  with  such  details  as  may  be  con- 
sistent, touching  their  desirability  and  safety  as  collec- 
tion agents. 

Assuring  you  that  whatever  you  may  say  to  us 
in  relation  to  the  institution  inquired  about  will  be 
treated  as  confidential  and  that  we  shall  be  happy  to 
render  you  a  reciprocal  service  whenever  it  may  be 
your  pleasure  to  call  upon  us,  we  are, 

Very  respectfully  yours, 


Form  14. — Form  of  letter  used  when  revising  credit  informa- 
tion IN  RECORD  to  banks. 


THE  CREDIT  DEPARTMENT  IN  BANKING  CREDIT    145 


Offered  hy        .  .  , , 

Date 

1 

SiKGLE 

Bills 
Rec 

1 
Collat. 

Under  Discount 

Purchased 

Loan  Department 

Total  now  held 
Due 

Gross  Profit  Last  Six  Months 
Av'ge  Balance    "            " 
Present  Balance 
Amount  of  Offering 
Time                  " 
Total,  if  accepted 

Resolution 

Last 

Statement 

Letters  of 
Inquiry 

Reports 

Approved 

Disapproved 

Form  15. — Form  used  in  a  bank  to  show  thk  general  state  of  a 
borrower's  account  when  a  loan  is  under  consideration. 


This  form  sets  forth  the  name  of  the  applicant,  the 
date,  the  amounts  of  any  loans  that  may  be  in  the  bank  at 
the  time  and  their  nature,  and  the  total  so  held.  It  is  nec- 
essary that  not  only  the  responsibility  of  a  person  should 
be  of  a  satisfactory  character,  but  it  is  also  important  that 
the  account  kept  by  him  in  the  bank  be  a  profitable  one; 
if  the  showing  of  the  latter  be  in  his  favor,  the  probability 
of  his  new  application  being  granted  will  be  augmented. 
There  is  set  forth  in  the  form  the  gross  profits  of  the 


146  CREDIT  AND  ITS  USES 

account  for  the  preceding  six  months,  the  average  balance 
during  that  period,  the  present  balance,  the  amount  of  the 
latest  offering,  the  time  it  is  desired  to  run,  and  the  total 
amount  that  would  be  owing  if  the  new  offering  be  ac- 
cepted. There  are  also  spaces  in  this  form  for  entries  in- 
dicating that  resolutions  have  been  adopted  authorizing 
the  borrower  to  contract  with  the  bank  for  the  loan,  the 
date  of  the  last  statement  in  hand,  information  as  to  letters 
of  inquiry  that  have  been  received,  also  as  to  reports  se- 
cured, and  notations  as  to  whether  the  application  is 
approved  or  disapproved  by  the  authorities  of  the  insti- 
tution. 

In  a  credit  department  in  a  bank  there  is  often  em- 
ployed a  card-index  system,  which  serves  two  purposes,  as 
shown,  for  example,  in  Form  16,  as  given  on  the  page 
opposite. 

The  first  purpose  is  the  preservation  of  an  accurate 
list  of  the  bank's  customers  and  others,  and  the  second  a 
notation  yearly,  in  the  spaces  indicated,  of  the  ratings  of 
Messrs.  R.  G.  Dun  &  Co.  and  the  Bradstreet  Agency,  the 
two  universally  recognized  standards  of  mercantile-agency 
service. 

While  the  institution  of  the  credit  department  in  bank- 
ing business  has  been  a  matter  of  slow  and  unsteady 
growth,  it  has  received  during  the  past  few  years  the  spon- 
sorship of  many  prominent  and  powerful  banks,  thus 
giving  it  a  permanence  in  banking  economy.  This  is 
strongly  evidenced  by  the  great  broadening  process  that 
has  developed  in  the  work  of  credit  departments  in  certain 
banks.  One  notable  departure  in  the  management  of 
credits  is  worthy  of  mention.  Professions,  trades,  and 
callings  have  been  assembled  and  classified;  each  classifi- 


•♦ 

01 

O) 

OS 

, 

n 

oo 

O) 

05 

, 

N 

r» 

O 

O) 

05 

1 

O 

o 

o 

O) 

, 

o 

m 

a> 

o> 

H 

;<5 

w 

Q 

Z 

o 

p. 

r/J 

y 

as 

« 

p 

rA 

u 

O 

ti 

Z 

o 

H 

a 

->1 

» 

o 

fe 

H 

Z 

t/J 

U) 

J3 

r1 

u 

<1 

<! 

H 

h 

h9 

O 

H 

Pi 

w 

s 

» 

H 

u 

n 

"d 

z 

•< 

ri 

o 

o 

^ 

ou 

o 

« 

■< 

y 

« 

» 

Q 

z 

148  CREDIT  AND   ITS   USES 

cation  is  assigned  to  a  separate  division  of  the  credit  de- 
partment, as  explained  in  the  following  list : 

Division  "A" 

CJollateral  Stocks  and  Bonds 

Grain,  Flour,  and  Feed 

Meat  Products,   Live  Stock  Commission 

Coal  Doctors  and  Lawyers 

Division  "B" 

Drygoods,  Millinery  Woolens,  Clothing,  Cloaks 

Furnishing  Goods,  Hats,  and  Caps 

Jewelry  and  Merchandising  Sundries 

Transportation  Ladies 

Division  "C" 

Agricultural  Implements,  Buggies,  Automobiles  and  Other  Vehicles 

Iron  and  Steel  Products 

Lumber,  Furniture,  etc.  Manufacturing  Sundries 

Division  "D" 

Stone,  Brick,  Cement,  Contractors,  Wall  Paper,  Paints,  Oils, 

Glass,  etc. 

Boots,  Shoes,  Leather,  Hides,  and  Wool 

,  Real  Estate  and  Insurance 

PubUshing,  Printing,  Engraving,  and  Paper  Miscellaneous 

Division  "E" 

Wholesale  and  Retail  Liquors,  Brewers  and  Brewers'  Supplies 

Tobacco 

Produce  Commission  and  Cold  Storage 

Groceries,  Drugs,  Restaurants 

Bakers  and  Hotels 

Division  "F" 
Banks  and  Bankers 


THE  CREDIT  DEPARTMENT  IN  BANKING  CREDIT    149 

This  plan  is  said  to  be  resulting  satisfactorily.  Under 
it  the  officers  (credit  men)  have  been  enabled  to  give  a 
much  closer  attention  to  the  interests  of  the  bank's  cus- 
tomers and  familiarize  themselves  more  thoroughly  with 
the  various  lines,  thus  anticipating  their  requirements.  It 
is  asserted  that  this  policy  has  also  enabled  those  in  charge 
to  extend  credit  more  intelligently,  and  protect  the  bank 
against  losses  which  might  in  some  cases  have  been  sus- 
tained under  the  old  method;  that  it  has  also  provided 
the  means  for  weeding  out  undesirable  accounts,  and  that 
the  wider  acquaintance  and  closer  attention  arising  from 
this  specialization  has  assisted  in  procuring  new  accounts. 

The  members  of  the  banking  profession  who  have 
been  advocating  the  recognition  of  the  credit  department 
by  their  own  calling,  have  the  satisfaction  of  realizing 
that  good  results  have  followed  their  efforts,  and  that  sub- 
stantial progress  may  be  looked  for  in  the  near  future. 
While  it  is  only  in  this  day  that  some  of  the  banks  in 
our  great  metropolitan  city  are  considering  the  advisability 
or  expediency  of  establishing  credit  departments,  and  this 
concession  to  progress  in  many  cases  is  being  grudgingly 
granted,  the  impact  of  modern  methods  is  producing  a 
wholesome  effect. 


11 


CHAPTEK    IX 

SOURCES    OF    CREDIT    INFOEMATION 

(A)  Salesmen's,  Attorneys',  and  Bank  Reports 

The  outline  of  the  work  of  a  credit  department  in  the 
banking  business  will  indicate  the  scope  of  credit-giving 
both  in  banking  and  in  commercial  affairs.  Such  work 
involves  responsibilities  of  a  grave  and  burdensome  char- 
acter. Every  credit  means  a  risk ;  the  circumstances  that 
enter  into  the  credit  are  attended  with  the  element  of  risk, 
and  the  safest  credit  is  that  in  which  the  hazard  is  mini- 
mized to  the  smallest  possible  degree.  The  risk  involved 
will  be  determined  by  the  sufficiency  and  accuracy  of  the 
information  gathered.  It  follows  that  the  dispensation  of 
credit  is  affected  by  two  leading  considerations:  first,  the 
character  of  information  secured ;  and  second,  the  wisdom 
shown  in  deciding  whether  the  risk  should  be  accepted  or 
declined.  The  credit  man  is  a  lay  judge;  he  has  to  pass 
upon  the  financial  and  personal  acceptability  of  the  people 
who  seek  business  accommodations.  He  is  required  to 
study  the  evidence  submitted  to  him ;  to  consider  that  which 
is  material,  and  discard  that  which  is  irrelevant.  After 
he  may  have  decided  that  the  case  is  one  of  merit,  he  must 
go  further  and  determine  to  what  extent  he  is  justified  in 
granting  credit. 

The  means  of  acquiring  credit  information  are  almost 
150 


SOURCES  OF  CREDIT  INFORMATION  151 

entirely  the  outgrowth  of  the  systems  suggested  and  put 
into  practice  by  those  engaged  in  commercial  credit.  The 
fact  that  the  systemization  of  credit-giving  was  undertaken 
by  commercial  houses  at  an  earlier  period  than  by  banks 
accounts  for  this  condition.  To  a  great  extent  the  same 
methods  must  be  utilized  by  banks  and  commercial  houses. 
The  fact  that  the  larger  volume  of  credit  information 
arises  from  the  necessities  of  commercial  intercourse  justi- 
fies confining  this  description  of  the  methods  employed  in 
securing  credit  information  to  those  followed  in  commercial 
credit.     One  writer  says : 

"The  relative  credit  of  different  merchants  is  a  great  tradition, 
a  large  mass  of  most  valuable  knowledge  which  has  never  been 
described  in  books  and  is  probably  incapable  of  being  so  described." 

It  would  be  an  impossibility  to  attempt  a  description 
of  the  relative  credit  of  merchants.  The  nearest  approach 
to  such  an  attempt  is  the  work  of  the  mercantile  agencies 
in  the  rating  books  published  by  them,  and  as  will  be  seen 
when  this  branch  of  the  subject  of  credit  information  is 
discussed,  the  large  number  of  changes  developing  every 
year  renders  these  books  approximate  guides  only  of  the 
reputed  standing  of  the  merchant.  The  changes  occurring 
daily  in  the  financial  status  of  merchants  makes  credit- 
giving  an  extremely  delicate  task ;  this  changing  character 
necessitates  constant  vigilance  on  the  part  of  those  charged 
with  the  dispensation  of  credit,  in  order  that  too  much  de- 
pendence may  not  be  placed  upon  old  information  when 
the  acceptability  of  an  account  is  being  considered. 

A  credit  man  who  conducts  a  well-regulated  credit 
office  will  not  be  satisfied  with  merely  drawing  from  one 
or  two  sources  of  information,  but  will  tap  every  spring 


152  CREDIT  AND  ITS  USES 

•whence  he  has  reason  to  believe  there  may  flow  such  data 
as  will  be  of  use  to  him  in  deciding  as  to  the  merits  or 
demerits  of  an  account.  Some  credit  men  act  upon  the 
theory  that  if  they  obtain  reports  from  two  or  three  sources 
and  find  nothing  derogatory  in  them,  they  are  entirely 
safe  in  deciding  that  credit  should  be  extended;  on  the 
other  hand,  if  they  were  to  have  a  definite  policy  as  to 
employing  information  from  every  reliable  known  source 
from  which  credit  information  is  obtained,  and  adhere  to 
the  policy  of  consulting  such  sources,  the  danger  of  making 
mistakes  would  be  largely  avoided.  It  will  be  contended 
that  the  employment  of  many  different  sources  of  infor- 
mation involves  a  great  deal  of  labor,  the  loss  of  time, 
and  unnecessary  expense,  but  this  is  not  a  reasonable 
objection,  for  imless  this  character  of  work  be  done, 
the  credit  man  has  failed  to  meet  the  necessities  of  his 
position. 

The  general  principles  of  credit,  viz.,  confidence,  trust, 
faith,  good  opinion,  business  reputation,  borrowing  ca- 
pacity, and  the  time  required  (the  element  of  futurity) 
apply  with  equal  force  to  all  branches  of  credit.  If  the 
application  of  these  principles  to  each  particular  case  be 
studied  by  the  credit  man,  and  considered  as  guides  in 
arriving  at  his  decision,  he  will  avoid  many  mistakes.  The 
prominence  of  the  element  of  risk  in  credit  work  pre- 
vents the  adoption  of  what  might  be  called  hard  and  fast 
rules. 

In  seeking  information,  preparatory  to  opening  an  ac- 
count, it  is  important  to  take  note  of  every  class  of  views 
it  is  possible  to  obtain.  It  is  often  supposed  that  when 
houses  express  an  unfriendly  opinion  of  a  man  who  is 
seeking  credit  they  may  be  doing  so  to  prevent  his  open- 


SOURCES  OF  CREDIT  INFORMATION  153 

ing  new  lines  of  credit,  or  because  of  some  petty  dispute 
they  har3  had  with  him,  in  which  he  may  have  been 
entirely  right  and  they  altogether  wrong.  In  order  to 
provide  against  overlooking  this  class  of  information,  in- 
vestigations should  be  as  diversified  as  possible. 


CREDIT   INFORMATION  OBTAINED   THROUGH   SALESMEN 

One  of  the  oldest  sources  of  credit  information  con- 
sists of  the  advices  and  general  reports  made  by  salesmen 
to  the  credit  departments  of  their  houses  in  regard  to 
people  from  whom  they  accept  new  orders  and  also  those 
who  may  have  been  customers  for  a  long  period.  The  idea 
of  utilizing  a  salesman's  abilities  and  time  for  this  pur- 
pose is  a  natural  one,  especially  in  reference  to  people  who 
are  not  in  the  habit  of  visiting  the  market,  and  who,  there- 
fore, are  known  only  by  name  and  reputation  to  the  firms 
from  whom  they  purchase  goods.  The  salesman  is  the 
only  representative  of  the  selling  house  the  customer  has 
ever  met.  He  does  not  know  tlie  principals  of  the  firms 
from  which  he  purchases,  and  he  has  never  met  the  credit 
man  or  the  person  who  passes  upon  his  desirability  as  a 
customer.  The  general  nature  of  the  salesman's  duties 
imposes  upon  him  the  necessity  of  being  friendly  with 
customers,  and  he  is  anxious  that  this  friendship  should 
be  reciprocated  in  order  that  his  ability  to  sell  goods 
may  be  helped  by  the  esteem  in  which  the  customer  may 
hold  him.  He  has  opportunities,  therefore,  of  asking  ques- 
tions that  do  not  come  within  the  province  of  even  the 
credit  man,  for  the  latter,  if  unable  to  meet  the  cus- 
tomer, must  depend  upon  correspondence  to  draw  forth 
such  information  as  he  may  desire.     It  would  seem  almost 


154  CREDIT  AND  ITS  USES 

unnecessary  to  call  attention  to  the  palpable  fact  that  cor- 
respondence, no  matter  how  diplomatic,  will  not  produce 
the  same  excellent  effects  upon  the  customer's  mind  as 
will  follow  an  oral  interview,  assuming  that  the  latt<?r 
is  conducted  with  evidences  of  friendly  regard  and  dig- 
nity. 

Proper  consideration  of  the  place  the  salesman  should 
occupy  in  business  economy  is  a  subject  to  which  sufficient 
attention  has  not  been  given  in  the  past.  ISTo  element  of 
business  requires  a  higher  order  of  intelligence  than  that 
of  salesmanship,  and  where  a  combination  of  intelligence 
and  good  education  is  found  the  results  will  be  correspond- 
ingly greater,  A  good  salesman  is  essentially  a  student  of 
markets.  He  can  only  bring  to  the  study  of  economic 
conditions  that  refinement  of  judgment  which  the  subject 
requires  when  he  has  at  least  a  rudimentary  knowledge  of 
the  facts  of  commerce  and  a  mind  trained  to  apply  those 
facts  of  commerce  to  everyday  questions.  As  the  friend 
and  in  many  cases  the  business  adviser  of  his  customer, 
he  has  opportunities  for  observing  the  habits,  the  tem- 
perament, and  the  environments  of  the  man  in  trade,  and 
these  opportunities  and  the  knowledge  acquired  through 
them  should  make  him  a  useful  ally  of  the  credit  man. 

In  order  to  have  the  information  obtained  through 
salesmen  submitted  in  systematic  form  it  is  customary 
to  use  blanks  upon  which  the  salesman  is  supposed  to 
submit  his  reports.  In  Form  17  is  presented  a  blank  for 
this  purpose  which  is  a  form  published  with  the  approval 
of  the  National  Association  of  Credit  Men,  the  adoption 
of  this  form  having  been  decided  upon  only  after  a  very 
large  number  of  forms  used  by  individual  houses,  mem- 
bers of  that  association,  had  been  thoroughly  examined. 


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SOURCES  OF  CREDIT  INFORMATION  157 

The  printed  matter  of  this  form  appears  on  two  sides, 
and  if  a  salesman  were  to  comply  with  its  requirements 
in  every  case  he  would  have  to  ask  many  questions  of  the 
present  or  prospective  customer.  It  must  be  understood 
that  this  would  require  considerable  of  the  salesman's 
time.  Also,  a  person  who  was  giving  the  salesman  a  first 
order  might  resent  being  asked  so  many  questions ;  again, 
it  is  doubtful  if  a  salesman  could  be  depended  upon  to 
ask  these  questions  with  the  intelligence  that  will  disarm 
criticism  and  at  the  same  time  produce  proper  answers. 
These  are  questions  regarding  which  there  seems  to  be  no 
definite  policy  followed  in  credit-giving.  A  salesman,  par- 
ticularly one  who  has  not  had  long  experience,  should  not 
be  expected  to  understand  the  full  import  of  all  the  ques- 
tions noted  on  the  form,  or  display  much  familiarity  with 
them.  Unless  a  report  submitted  by  him  be  marked  by 
intelligence  and  completeness,  such  a  report  is  wholly  lack- 
ing in  value,  and  dependence  upon  it  is  attended  with 
danger  to  the  interests  of  the  house.  The  questions  that 
the  salesman  must  ask  the  customer,  if  a  report  such  as  the 
foregoing  is  to  be  fully  made  out,  would  be,  the  name  of 
the  firm,  the  names  of  the  partners,  their  nationalities, 
ages,  whether  married  or  single,  how  long  the  firm  had 
been  in  business,  whether  it  does  a  cash  or  credit  busi- 
ness, whether  insurance  is  carried,  figures  as  to  real  estate 
owned,  any  other  assets  owned,  and  the  names  of  parties 
from  whom  the  trader  is  purchasing  his  goods.  To  do  all 
this  in  a  manner  taat  will  prove  agreeable  to  the  purchaser 
can  only  be  expecTed  of  a  man  who  has  had  a  long  and  suc- 
cessful experience  in  salesmanship  and  who  has  been 
thoroughly  coached  in  the  credit  duties  required  of  a  sales- 
man.    There  are  other  questions  which  he  will  be  able 


158  CREDIT  AND  ITS  USES 

to  answer  satisfactorily  if  his  powers  of  observation  be 
developed  and  acute,  viz.,  of  what  the  stock  consists,  its 
condition,  how  many  clerks  are  employed,  the  desirability 
of  the  business  location,  his  estimate  of  the  value  of  the 
stock,  his  opinion  of  the  value  of  the  real  estate,  and  the 
value  of  other  assets.  He  is  also  expected  to  consult  local 
authorities  as  to  the  habits,  ability,  and  personal  expenses 
of  the  customer,  and  also  whether  he  is  thought  to  be 
making  money.  ISTo  salesman  can  or  will  answer  these 
questions  vrith  that  degree  of  thoroughness  which  is  essen- 
tial to  a  good  report  unless  "  he  has  at  least  a  rudimentary 
knowledge  of  the  facts  of  commerce  and  a  mind  trained 
in  the  application  of  those  facts  of  commerce  to  everyday 
questions." 

It  is  true  that  these  forms  are  used  by  many  credit 
departments  in  the  hope  that  the  salesman  will,  through 
the  fact  of  his  being  expected  to  send  some  information, 
make  a  report,  if  only  a  desultory  one ;  but  unless  this 
feature  of  credit  information  be  given  thorough  attention, 
a  slurring  or  ignorant  treatment  of  it  will  mislead  the 
credit  man  in  considering  the  information. 

Form  18  represents  a  form  which  is  of  a  much  briefer 
character  than  the  one  described,  it  being  a  part  of  the  order 
blank  upon  which  the  salesman  sends  in  the  full  details 
of  the  order  taken  by  him,  the  data  in  reference  to  the 
order  appearing  on  the  face  of  the  form,  and  the  infor- 
mation for  the  use  of  the  credit  department  on  its 
reverse  side. 

The  questions  asked  correspond  very  closely  to  those 
heretofore  mentioned.  The  questions  as  to  the  amount  of 
annual  license  and  its  expiration  are  included  because  this 
particular  form  (Form  18)  is  used  by  a  wholesale  liquor 


SOURCES  OF  CREDIT  INFORMATION  159 

concern,  and  the  question  as  to  the  amount  of  license,  etc., 
is  a  \'ery  important  item  in  that  business. 

Some  credit  men  express  themselves  as  unwilling  to  be 
influenced,  either  favorably  or  otherwise,  by  reports  re- 
ceived from  salesmen,  on  the  ground  that  the  salesman  is 
in  nearly  every  case  actuated  by  selfish  motives,  his  dispo- 
sition being  to  give  only  such  information  as  will  be  help- 
ful in  effecting  a  sale,  and  that  he  will  withhold  informa- 


PLEASE  ANSWER  FOLLOWING  QUESTIONS  WHEN  YOU  SEND  ORDER 


What  line  of  business  ?_ 


W.  o  compose  the  firm?. 
Ag« — and  if  married  ? 


Business  capacity  (fair,  good,  or  excellent)?. 

Prospects  for  success? 

Habits  ? 


How  long  in  business?. 
If  prompt  pay? 


If  ever  failed,  when  and  where  ?. 

Capital  invested  in  business? 

Average  amount  of  stock  ? 

Amount  of  annual  license  ? 

When  does  same  expire? 

Remarks  ? 


Form  18. — Brief  form  for  use  of  salesmen  in  furnishing  credit 
information. 


160  CREDIT  AND  ITS  USES 

tion  of  an  unfavorable  character  for  fear  that  he  may  lose  a 
customer.  This  opinion,  entertained  by  certain  credit  men 
consulted,  is  not  a  universal  one,  those  in  charge  of  the 
credit  departments  of  some  very  large  institutions  holding 
that  information  received  from  salesmen,  especially  those 
who  have  followed  the  calling  for  a  number  of  years,  is 
of  a  most  valuable  character.  In  discussing  "  the  sales- 
man "  a  short  time  ago  a  writer  said  that  his  considerations 
were  the  following : 

"  First,  himself ;  second,  his  customer ;  third,  his  house ;  and 
fourth,  the  credit  man." 

If  this  be  correct,  little  dependence  should  be  placed 
upon  credit  information  from  salesmen.  The  character- 
ization is  overdrawn,  although  with  a  certain  class  of  sales- 
men their  first  consideration  is  usually  themselves,  and 
next  to  their  own  interests  they  desire  to  subserve  those 
of  the  customer,  forgetting  that  it  is  not  the  customer  who 
employs  them,  and  that  their  first  duty  is  to  those  by  whom 
they  are  employed. 

The  chief  difficulty  in  developing  this  source  of  credit 
information  is  that  the  method  involved  requires  a  combi- 
nation of  credit  man  and  salesman  in  one  personality; 
while  this  combination  exists  among  some  men  to  a  very 
marked  degree,  it  is  only  infrequently  discovered.  The 
character  of  information  obtained  through  a  salesman  de- 
pends almost  entirely  upon  his  personality.  If  he  be  a 
careful,  conservative  man  he  will  exercise  discretion  in 
procuring  his  information,  and  endeavor  to  the  best  of  his 
ability  to  safeguard  his  firm  when  it  is  extending  credit. 
If  he  be  a  person  who  feels  that  this  branch  of  his  work 
is  one  not  requiring  a  great  deal  of  attention,  or  if  he  be 


SOURCES  OF  CREDIT  INFORMATION  161 

by  nature  disqualified  from  giving  it  the  necessary  atten- 
tion, the  results  can  very  quickly  be  discerned  in  the  re- 
ports submitted  by  him.  One  credit  man  has  said  on  this 
point : 

"It  is  my  custom  to  exact  of  the  agent  a  report  of  his  own 
observation  and  impressions  of  the  customer.  I  do  not  always 
get  this  and  many  times  when  I  do  it  is  of  no  value.  I  am  to-day 
working  with  men  who  are  as  different  as  men  possibly  could  be, 
one  with  a  mind  that  is  capable  of  analysis,  careful  observation, 
quick  to  be  suspicious  of  little  things  that  tend  to  affect  a  man's 
credit,  and  another  who  sees  nothing,  apparently  knows  nothing, 
but  is  always  ready  to  venture  the  statement  that  the  party  is 
perfectly  good,  and  'don't  owe  a  dollar  in  the  world.'  These 
reports,  like  all  other  information,  have  to  be  considered  with  their 
origin  in  mind,  and  in  connection  with  other  information  which 
you  have." 


On  the  salesman's  behalf  it  should  be  said  that  he  is 
expected  to  sell  goods  and  not  to  make  credits,  or  rather, 
the  selling  of  the  goods  is  the  primal  motive  of  his  occupa- 
tion. Unless  he  is  able  to  cover  the  territory  assigned  to 
him  in  a  reasonable  period  and  dispose  of  as  large  an 
amount  of  goods  as  the  firm  considers  should  be  sold  within 
that  period,  he  will  be  looked  upon  with  disfavor.  An 
undue  desire  to  make  sales,  irrespective  of  the  probability 
of  payment  being  secured,  is  very  harmful  to  the  interests 
of  a  house,  but  the  following  opinion  expressed  by  a  promi- 
nent credit  man  proves  that  such  a  policy  does  obtain 
among  salesmen. 

"  It  would  be  an  assistance  to  the  credit  department  if  salesmen 
could  be  induced  to  use  a  Uttle  more  judgment  and  not  be  too 
anxious  to  make  a  sale,  but  it  is  very  difficult  to  get  the  information 
you  absolutely  require  from  salesmen.      My  experience  has  been 


162  CREDIT   AND   ITS  USES 

that  there  are  very  few  of  them  who  can  size  up  a  man  in  making  a 
sale ;  in  fact,  I  find  that  they  are  very  apt  to  report  favorably  on 
a  concern  when  it  is  not  deserved." 


The  failure  of  the  salesman  to  take  a  broad  view  of 
questions  involved  in  the  credit  responsibility  of  his  cus- 
tomers may  be  due  to  the  failure  of  the  credit  man  to  incul- 
cate among  salesmen  a  proper  respect  for  the  responsibility 
imposed  upon  them  as  sources  of  credit  information.  If 
salesmen  are  not  instructed  in  regard  to  this  feature  of 
their  work  they  cannot  be  expected  to  discharge  it  with 
the  satisfaction  that  would  otherwise  be  secured.  Some 
credit  offices  make  it  a  practice  to  see  that  salesmen  are 
thoroughly  informed  in  regard  to  the  condition  of  their 
customers'  accounts,  and  are  thus  enabled  to  form  a  much 
clearer  conception  of  the  treatment  that  should  be  accorded 
the  customer  than  if  they  were  not  in  possession  of  this 
information.  A  credit  man  in  a  leading  line  has  given 
the  following  description  of  this  method : 

"  Each  traveler  when  he  starts  out  has  in  his  pocket  a  book  of 
convenient  size  showing  the  names  of  every  man  in  every  tovm 
he  is  to  visit  upon  whom  we  desire  he  shaU  call.  Opposite  each 
man's  name  is  a  figure  showing  the  limit  of  credit  we  are  wilUng  to 
give  that  man.  We  send  to  each  traveler,  so  that  he  may  know 
from  ten  to  twelve  days  ahead  of  the  date  he  is  to  visit  the  town,  a 
paper  which  we  call  a  'statement  of  accounts.'  It  is  ruled,  showing 
notes,  total  open  account,  amount  of  open  account  due,  and  a  line 
for  remarks.  The  traveler  looks  over  this  paper  and  sees  just 
how  much  a  man  on  whom  he  is  to  call  owes  and  what  amount  is 
overdue  on  a  basis  of  four  months,  which  are  our  terms  of  sale. 
On  the  line  for  remarks  I  am  in  the  habit  of  saying  something  about 
each  customer,  so  that  the  history  of  each  man's  account  is  given 
to  a  traveler  before  he  reaches  the  town  in  which  the  customers  on 
whom  he  is  to  call  live." 


SOURCES  OF  CREDIT  INFORMATION  163 

If  the  credit  man  expects  to  secure  througli  the  sales- 
man the  information  which  will  be  of  practical  value  to 
him  in  dispensing  credits,  it  is  his  duty  to  cultivate  close 
relations  with  the  salesman  and  make  the  latter  feel  that 
his  best  work  in  obtaining  reliable  credit  data  will  be  ap- 
preciated by  the  credit  office;  that  the  more  reliable  the 
information  he  imparts,  the  less  liability  there  will  be  to 
either  crediting  unworthy  customers  or  dismissing  appli- 
cations for  credit  which  really  deserve  favorable  considera- 
tion. The  effective  treatment  of  these  phases  of  credit  will 
inure  to  the  great  advantage  of  the  salesman,  in  that  a  de- 
sirable class  of  customers  will  be  secured  and  their  patron- 
age retained  for  a  long  time,  thus  insuring  him  a  steady 
and  fruitful  source  of  income. 

There  should  be  mutuality  between  salesmen  and 
credit  men.  One  of  the  important  phases  of  this  should 
be  the  education  of  the  salesman  as  to  his  exact  duties  in 
regard  to  obtaining  credit  information,  and  helpful  sug- 
gestions as  to  the  best  means  for  obtaining  it.  In  this  way, 
if  he  have  that  aptitude  which  is  a  distinctive  character- 
istic of  many  of  those  with  whom  salesmanship  is  a  voca- 
tion, a  better  means  for  obtaining  reliable  credit  data  will 
be  afforded  and  a  source  of  credit  information  developed 
which  will  possess  many  advantages. 

ATTORNEYS-AT-LAW  AS  A  MEDIUM  OF  CREDIT 
INFORMATION 

The  second  species  of  credit  information  to  be  dis- 
cussed is  that  secured  through  the  services  of  attorneys. 
There  are  many  reasons  why  an  attorney  is  an  excellent 
medium  for  the  procurement  of  credit  information:  first, 


164  CREDIT   AND  ITS  USES 

the  organization  of  his  office  makes  it  convenient  for  hira 
to  act  as  a  collector  and  distributor  of  such  information; 
second,  a  lawyer  invariably  has  a  large  circle  of  acquaint- 
ances, both  of  a  business  and  social  character,  and  this 
acquaintance  enables  him  to  secure  information  in  regard 
to  the  circumstances  of  people  to  better  advantage  than 
others  whose  connections  are  not  so  extended;  third,  a 
lawyer's  duties  afford  him  much  private  information  in 
respect  to  people's  affairs,  a  large  percentage  of  which  in- 
formation he  is  at  perfect  liberty  to  utilize  as  credit  ma- 
terial without  in  any  sense  disclosing  professional  secrets; 
fourth,  his  daily  association  with  matters  in  litigation 
opens  to  him  an  ample  field  of  information,  a  good  part 
of  which  is  hearsay,  but  a  large  portion  of  which  may  also 
have  considerable  foundation  in  fact,  and  this  information 
of  either  class  can  be  judiciously  diffused  for  credit  pur- 
poses; fifth,  he  is  frequently  called  upon  to  act  as  a  col- 
lector of  claims  against  people  or  in  behalf  of  clients  in 
cases  where  accounts  are  of  a  disputed  character.  The 
information  he  acquires  through  association  with  this 
work  is  of  vital  interest  to  credit  givers  and  no  better 
class  of  information  could  be  obtained.  There  are  entirely 
honorable  ways  in  which  this  information  can  be  conveyed 
to  those  who  extend  credit,  ^vithout  impairing  the  pro- 
fessional honor  of  the  attorney.  It  is  therefore  natural 
that  those  who  give  credit  should  turn  to  attorneys  as 
a  medium  of  credit  information.  The  utilization  of  the 
services  of  attorneys  in  this  respect  has  been  in  the  main 
satisfactory,  although  it  has  at  the  same  time  developed 
certain  abuses  which  should  not  be  overlooked.  In  their 
desire  to  secure  collection  and  litigated  business  some  at- 


SOURCES  OF  CREDIT  INFORMATION  165 

torneys,  a  number  of  years  ago,  proffered  their  services 
practically  without  charge  in  respect  to  credit  information, 
in  consideration  of  collections  and  other  business  being 
sent  to  them.  Efforts  were  made  to  systematize  this  work 
by  the  preparation  of  lists  of  attorneys.  Subscriptions 
were  sought  and  accepted  from  mercantile  houses  and 
banks,  the  lists  being  placed  at  their  disposal,  with  forms 
for  use  in  asking  for  credit  information  and  forwarding 
claims.  Business  houses  and  others,  having  paid  a  sub- 
scription price  for  the  use  of  this  book,  seemed  to  feel  that 
they  should  secure  the  latest  and  fullest  information  ob- 
tainable in  respect  to  credit  risks  from  the  attorneys 
whose  names  appeared  in  the  list.  This  scheme  worked 
satisfactorily  for  a  time,  but  it  quickly  developed  that  the 
attorneys  were  giving  everything  and  getting  nothing; 
for  while  a  house  might  make  inquiries  on  a  large  number 
of  people,  it  was  only  in  rare  instances  that  it  would  feel 
called  upon  to  enlist  the  services  of  the  attorney.  It  was 
supposed  that  the  policy  of  reciprocity  would  obtain  under 
this  system,  but  the  advantages  were  not  of  an  entirely 
reciprocal  character,  the  balance  being  too  much  in  favor 
of  one  side — the  merchant's.  As  a  result  of  this  condi- 
tion attorneys  became  indifferent  as  to  the  service  ren- 
dered imless  they  were  paid  for  such  service.  This  has 
given  rise  to  dissatisfaction  among  business  men  in  regard 
to  the  attorneys'  reports,  a  dissatisfaction  which  is  freely 
expressed  by  many  of  the  writer's  correspondents,  some 
of  whom  do  not  hesitate  to  belittle  them.  Credit  depart- 
ments that  are  availing  themselves  of  attorneys'  services 
for  credit  reports,  assert  at  the  same  time  that  they  do  not 
place  a  great  deal  of  value  on  them  and  that  the  service 
13 


166  CREDIT  AND  ITS  USES 

is  not  satisfactory.  It  is  charged  that  reports  are  not 
promptly  made;  that  attorneys  fail  to  go  into  the  details 
of  a  case  and  depend  too  much  on  their  memories  and  gen- 
eral knowledge  of  the  standing  of  people  in  making  re- 
ports; that  these  reports  lack  explicitness,  and  that  meager- 
ness  of  information  is  one  of  their  principal  shortcomings. 
On'  the  other  hand,  there  are  credit  men  who  rely  upon 
attorneys'  reports  and  say  that  it  is  their  invariable  cus- 
tom to  send  a  small  fee  with  the  inquiry,  and  that  the  re- 
sults secured  from  this  channel  of  credit  information  they 
consider  valuable.  The  whole  question  resolves  itself 
into  this:  that  while  there  are  cases  in  which  certain 
attorneys  may  be  inefficient  or  inattentive  in  the  matter 
of  credit  reporting,  these  represent  no  larger  a  percentage 
of  the  profession  at  large  than  is  represented  by  the  ineffi- 
cient and  indifferent  persons  of  any  calling.  "When  an 
attorney  is  found  inefficient  it  is  useless  to  continue  to 
ask  him  for  information,  but  if  reliable  and  timely  infor- 
mation is  wanted,  the  only  effective  way  to  secure  it  (in 
justice  to  the  credit  office  and  the  attorney)  is  to  pay  for 
it.  That  which  a  man  gives  for  nothing  is  usually  worth 
nothing.  The  theory  of  reciprocity,  as  it  relates  to  credit 
reporting,  has  been  worked  to  the  uttermost,  and  its  re- 
sults are  disappointing  to  those  from  whom  the  informa- 
tion is  sought. 

An  effort  was  made  some  years  ago  by  a  committee 
of  the  National  Association  of  Credit  Men  to  have  credit 
offices  keep  a  card-indexed  list  of  attorneys  for  purposes 
of  credit  reporting  as  well  as  making  collections.  Investi- 
gation indicates  that  these  card  lists  are  not  in  general  use, 
and  that  in  many  cases  where  they  were  installed,  they 


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SOUECES  OF  CREDIT  INFORMATION  169 

have  been  discarded.  The  principal  reason  for  the  elimi- 
nation of  the  card  lists  of  attorneys  as  a  feature  of  credit- 
office  work  is  that  during  the  past  few  years  there  has  been 
developed  a  large  number  of  excellent  law  lists  which  are 
in  use  by  credit  men.  These  law  lists  are  prepared  under 
the  auspices  of  responsible  concerns  and  published  in  at- 
tractive form.  Revisions  are  made  with  due  regularity 
and  a  list  of  this  kind  obviates  the  necessity  of  the  credit 
man  keeping  a  card  list  of  his  own,  the  proper  attention 
to  the  preservation  of  which  would  require  constant 
thought  and  care.  Another  advantage  of  the  lists  pub- 
lished in  book  form  is  that  in  nearly  all  cases  the 
names  of  attorneys  appearing  in  the  list  are  under  con- 
tract with  the  publishing  company  to  furnish  credit  in- 
formation. 

In  Form  19  is  submitted  a  form  of  attorneys'  report 
blank  which  has  received  the  indorsement  of  the  ISTational 
Association  of  Credit  Men. 

One  of  the  first  things  set  forth  in  this  form  is  that  the 
sum  of  $1.00  is  inclosed  to  pay  for  the  report  asked  for. 
This  amount  would  be  recognized  as  a  fair  compensation 
for  an  average  report.  If,  however,  the  preparation  of 
a  report  involved  considerable  research  of  county  and 
other  records  and  much  interviewing  of  local  authorities 
by  the  law^^er  or  his  representatives,  the  fee  would  not 
adequately  cover  such  services.  It  is  presumed  that  con- 
siderable of  the  information  could  be  entered  upon  the 
blank  without  loss  of  time  or  references  to  papers  or 
people.  At  the  same  time,  in  a  case  where  the  attorney 
had  prepared  a  report  as  asked  for,  and  received  a  second 
request  for  a  report  upon  the  same  person  within  a  short 


170  CREDIT  AND  ITS  USES 

time,  the  task  of  bringing  the  information  down  to  date 
would  be  simple  and  the  compensation  mentioned  a  very 
fair  one.  Many  of  the  questions  in  this  form  are  the 
same  as  in  the  salesman's  blank  and  therefore  do  not  re- 
quire further  explanation.  The  form  embodies  many  of 
the  essential  elements  of  the  blanks  furnished  by  the  law- 
list  companies.  When  detailed  information  is  required, 
in  respect  to  real  estate  holdings  and  liens  upon  them, 
the  services  of  an  attorney  are  necessary.  He  and  his 
clerks  are  qualified  to  search  for  and  impart  such  informa- 
tion intelligently,  although  his  assistants  may  not  be  en- 
tirely fitted  to  act  as  investigators  on  general  credit  mat- 
ters. While  no  attempt  is  made  to  disguise  the  fact  that 
the  services  of  attorneys  on  the  question  of  credit  report- 
ing is  not  held  in  universal  esteem,  in  justice  to  them,  and 
especially  to  those  members  of  the  profession  who  have 
made  a  determined  effort  to  acquit  themselves  creditably 
in  this  work,  it  is  proper  to  quote  a  few  opinions  of  prom- 
inent credit  men  which  are  highly  favorable  to  attorneys 
as  gatherers  of  credit  data,  and  also  set  forth  reasons  why 
their  services  are  desirable.  For  example,  this  from  a 
Chicago  credit  man: 

"I  consider  attorneys'  reports  as  among  the  most  valuable  of 
our  sources  of  information : 

"First:  Because  they  are  from  men  right  on  the  ground.  Col- 
lection attorneys,  for  the  most  part,  give  honest  information. 

"Second:  Because  the  information  so  obtained  is  compara- 
tively inexpensive,  being  paid  for  almost  wholly  by  an  exchange 
of  business, 

"Third:  Because  a  good  idea  can  be  formed  of  the  attorney's 
collection  ability  from  the  nature  of  the  report  he  makes,  and  his 
care  in  making  it." 


SOURCES  OP  CREDIT  INFORMATION  171 

The  following  from  a  leading  representative  of  the 
credit  profession  in  Baltimore: 

"My  experience  seems  to  warrant  the  opinion  that  the  attor- 
ney's assistance  in  the  investigation  of  credits  was  frequently  more 
valuable  than  his  direct  assistance  in  making  collections.  The  at- 
torneys used  were  generally  recommended  by  some  reputable  com- 
pany or  those  I  had  met  in  the  com-se  of  my  credit  experience." 


The  last  opinion  cited  is  that  of  a  credit  man  of  a 
representative  Boston  concern: 

"The  local  attorney  in  many  instances  is  thoroughly  familiar 
with  the  habits  of  the  party  to  be  investigated,  also  his  manner  of 
living,  amount  of  business  done,  and  how  he  stands  socially  and 
financially  in  the  community.  He  is  also  in  a  position  to  know 
of  any  real  estate  recorded,  also  mortgages,  and  in  many  instances 
knows  when  accounts  are  in  attorneys'  hands  for  collection.  At- 
torneys report  promptly ;  in  most  instances  by  return  mail.  Blanks 
are  furnished  by  companies  supplying  the  law  lists,  and  it  has  been 
the  writer's  experience  that  printed  forms  containing  regular  ques- 
tions to  be  answered  are  more  satisfactory  than  a  blank  form,  as 
attorneys  will  simply  reply  in  a  general  way." 


In  certain  cities  of  the  first  and  second  class,  law  firms 
doing  a  large  commercial  business  have  found  that  the 
services  they  have  rendered  in  credit  matters  have  been 
of  great  benefit  to  them  in  the  acquirement  of  a  large 
number  of  clients  whose  commercial  business  is  of  a  very 
profitable  character.  These  law  firms  have  installed  com- 
mercial departments,  one  of  the  principal  duties  of  which 
is  to  gather  credit  data.  The  consequence  is  that  the 
work  is  done  in  a  systematic  and  thorough  manner;  those 
charged  with  its  prosecution  become,  by  association  with 


172  CREDIT  AND  ITS  USES 

it,  experienced  and  proficient;  and  another  very  great 
advantage  is  that  after  a  number  of  years  the  constant 
accumulation  of  credit  information  provides  a  set  of  files 
equal,  and  in  many  cases  superior,  in  value  and  material 
to  those  held  by  the  mercantile  agencies. 

BANK  REFERENCES 

Some  credit  departments  consider  it  a  good  practice  to 
address  letters  of  inquiry  to  banks  soliciting  their  opinions 
of  applicants  for  credit.  It  cannot  be  said  that  the  infor- 
mation acquired  in  this  way  is  of  a  great  deal  of  value, 
for  the  reason  that  the  bank  should  not  be  expected  to, 
and  neither  w'ill  it,  tell  in  plain  words  just  what  line  of 
accommodation  it  accords  a  man  or  the  exact  state  of  its 
account  with  him.  While  it  is  hoped  that  the  day  may 
come  when  a  bank's  relations  with  its  customers  will  be 
looked  upon  as  disclosable  facts  (in  the  same  sense  that 
business  houses  freely  open  their  books  to  one  another), 
it  cannot  be  denied  that  for  banks  to  explain  in  detail  the 
nature  of  their  relations  with  customers  would  in  a  good 
many  instances  result  in  trouble  for  all  concerned.  Some 
houses  might  be  so  timorous  as  to  feel  that  they  were  not 
safe  in  extending  reasonable  credit  lines  for  merchandise, 
because  a  man  was  owing  his  bank  a  considerable  amount 
of  money,  obtained  through  the  ordinary  channels  of 
bank  accommodation.  The  contraction  of  his  credit  due 
to  such  fear  would  prove  harmful  to  his  business  reputa- 
tion. 

This  leads  to  the  thought  that  a  closer  relationship  be- 
tween mercantile  interests  and  banks  is  desirable  on  the 


SOURCES  OF  CREDIT  INFORMATION  173 

subject  of  credit  intercliange,  as  the  influence  of  both 
would  be  widened  and  many  severe  losses  obviated. 
Credit  interchange  consists  not  merely  in  stating  whether 
a  man  is  prompt  or  slow,  but  in  the  diffusion  of  the  great 
mass  of  information  assembled  from  all  quarters  and  dis- 
tributed for  the  benefit  of  all  interested.  When  ques- 
tioned on  this  subject  bankers  have  replied,  "  Banks  have 
no  information  to  give,  they  cannot  be  expected  to  tell 
the  private  business  of  their  customers."  To  do  so  might 
have  the  effect  of  driving  some  customers  away  from 
the  banks  with  which  they  were  doing  business.  It  is 
true  that  the  relations  of  a  bank  with  its  customers 
are  of  a  more  private  character  than  the  relations  of 
these  same  customers  with  houses  from  which  they 
purchase  merchandise.  There  are  certain  reasons  for 
this: 

1.  A  merchant  is  usually  debtor  to  his  bank  in  a  much 
larger  amount  than  to  any  individual  house  with  which  he 
is  dealing. 

2.  In  order  to  secure  the  accommodation  he  desires 
he  may  have  induced  some  relative  or  friend  to  guarantee 
his  account  Avith  the  bank,  and  if  the  latter  is  expected  to 
give  out  such  information  as  this  when  called  upon  by  a 
merchandise  creditor  (who  may  have  only  a  trifling  order 
at  stake)  it  would  have  to  disclose  the  fact  of  the  account 
being  guaranteed. 

3.  Such  information  might  be  misinterpreted  and  lead 
to  rumors  that  the  merchant  must  be  weak,  as  his  bank 
required  a  guarantee  for  his  account,  and  such  rumors 
would  do  incalculable  harm. 

Conditions  such  as  those  referred  to   are  probably 


174  CREDIT  AND  ITS  USES 

accountable  for  some  of  the  opinions  expressed  by  one  of 
the  writer's  correspondents: 

"  The  banker  and  jobber  do  not  get  along  in  the  way  of  commer- 
cial reports.  It  is  well  known  to  credit  men  that  very  little  reliance 
can  be  placed  upon  a  report  given  by  a  bank  upon  the  country 
merchant.  If  the  merchant  is  not  doing  business  with  the  banker, 
the  latter  simply  returns  the  inquiry  saying  that  he  is  not  doing 
business  with  him,  or  gives  information  which  is  not  of  much  value. 
We  had  a  customer  in  a  town  in  which  there  were  three  banks. 
We  knew  the  customer  to  be  slow  pay  and  were  in  doubt  as  to  the 
continuance  of  the  account.  I  sent  an  inquir}'  to  each  of  the  three 
banks  regarding  this  merchant.  One  bank  stated  that  he  was 
slow  pay  and  they  frequently  had  drafts  on  him,  very  few  of  which 
were  paid.  (This  information  coincided  exactly  with  our  own 
experience.)  The  second  bank  said  that  they  did  not  believe  that 
the  party  was  good  for  the  credit  named,  as  he  was  too  slow,  and 
they  could  not  recommend  him  for  the  acconunodation.  The  third 
bank  stated  that  he  was  prompt  pay,  a  responsible  party,  and  good 
for  his  needs,  and  that  they  would  not  hesitate  to  recommend  him 
for  the  amount  of  the  order  in  question.  It  is  easy  to  see  where  this 
man  kept  his  bank  account,  and  also  that  he  had  had  some  trouble 
with  one  of  the  banks.  If  our  inquiry  had  been  directed  only  to 
the  third  bank,  you  can  see  what  misleading  information  we  would 
have  had." 

The  statements  contained  in  the  foregoing  are  typical 
of  the  views  frequently  expressed  by  credit  men  in  respect 
to  bank-credit  information.  They  are  not  complimentary 
to  what  is  recognized  as  the  most  powerful  agency  in  onr 
whole  commercial  structure  (the  banking  business)  and  it 
is  probable  that  a  good  deal  of  the  displeasure  entertained 
by  merchants  and  credit  men  on  this  question  is  due  to: 
first,  a  misconception  of  the  information  the  bank  should 
be  expected  to  impart;  second,  the  nature  of  its  relations 
with  its  customers;  and  third,  the  danger  of  an  indis- 


SOURCES  OF  CREDIT  INFORMATION  175 

criminate  diffusion  of  the  inner  facts  relating  to  bank 
accounts. 

In  justice  to  the  banker  something  should  be  said  of 
the  criticisms  in  the  excerpts  quoted. 

1.  As  to  his  returning  an  inquiry  upon  a  person  with 
whom  he  is  not  doing  business,  and  giving  information 
which  is  not  of  much  value,  the  point  is,  should  he  be  ex- 
pected to  give  out  information  as  to  why  the  man  inquired 
about  may  have  been  compelled  to  close  his  account  at  the 
bank,  or,  on  the  other  hand,  if  the  bank  has  never  done 
business  with  him,  should  the  banker  be  expected  to  act 
as  an  advising  medium  at  the  expense  of  his  time  and  with 
no  recompense  for  his  labor  or  information? 

2.  The  information  of  the  first  bank  cited  was,  accord- 
ing to  my  correspondent's  OAvn  statement,  a  truthful  one, 
and  one  that  confirmed  his  own  experience.  The  same 
thing  may  be  said  of  the  information  of  the  second  bank. 

3.  The  third  bank  was  certainly  at  fault,  probably 
through  ignorance  of  the  merchant's  real  reputation  as 
a  business  man,  although  some  might  say  a  harsher  judg- 
ment was  warranted.  Dismissing  the  bank's  culpability 
in  this  particular  case,  the  incident  cited  shows  that  in- 
formation sought  in  this  way,  or  among  merchants  as  well, 
is  not  always  reliable  and  that  all  information  must  be 
weighed  in  connection  with  the  general  aspect  of  the  case, 
otherwise  such  information  will  mislead  and  do  harm  that 
cannot  be  satisfactorily  repaired.  Information  sought  by 
merchants  from  banks  through  correspondence  is  not 
meted  out  in  a  measure  that  proves  agreeable  to  the  mer- 
chants. Some  of  the  reasons  for  this  have  been  explained, 
and  there  will  be  no  appreciable  change  in  this  condition 


176  CREDIT  AND  ITS  USES 

until  sucli  time  as  credit  interchange  is  liberally  prac- 
ticed among  the  bankers  themselves;  when  that  state  of 
affairs  obtains,  the  next  step  will  be  the  recognition  of  the 
interdependence  of  bankers  and  merchants  in  the  matter 
of  credit  interchange,  with  results  that  will  be  eminently 
gratifying  to  the  commercial  interests  of  the  country. 


CHAPTER   X 

SOURCES    OF    CKEDIT    INFOEMATION Continv^ 

(B)  Written  References  and  Inquiry  Forms — Written 
and  Signed  Statements — Oral  Investigations — Trav- 
eling Credit  Representatives  and  Special  Reports 

WRITTEN  REFERENCES  AND   INQUIRY   FORMS 

One  of  the  common  practices  of  all  trades  is  to  ask  a 
person  for  his  references  when  he  is  making  his  first  pur- 
chase. It  is  proper  to  considt  the  references  that  the 
applicant  for  credit  may  give,  but  the  credit  man  must  not 
stop  there.  It  is  not  probable  that  the  applicant  for  credit 
would  tender  the  names  of  people  other  than  those  with 
whom  he  stood  well,  and  it  is  not  to  be  supposed  that  he 
would  recommend  the  men  from  whom  he  expected  a 
credit  favor  to  go  among  those  who  did  not  entertain 
a  good  opinion  of  him.  The  tremendous  increase  in  the 
number  of  those  engaged  in  trade  during  the  last  twenty- 
five  years  has  necessitated  a  great  volume  of  correspond- 
ence on  the  subject  of  references,  and  in  order  to  system- 
atize and  minimize  the  labor  imposed  upon  credit  offices, 
reference  forms  are  used.  In  their  earlier  use  these  forms 
simply  requested  information  as  to  whether  a  man  was 
prompt  or  behind  in  his  payments,  and  a  general  estimate 
of  his  character.     Either  below  this  printed  matter  or  on 

177 


178  CREDIT  AND  ITS  USES 

the  opposite  page  there  were  lines  for  the  reply,  and  it 
followed  that  the  information  in  response  to  such  an  in- 
quiry would  be  general  and  evasive  in  its  terms.  In  order 
to  obviate  this  difficulty  and  to  still  further  minimize  the 
work  of  the  credit  department,  forms  were  prepared  con- 
taining certain  questions  opposite  which  the  recipient  waa 
supposed  to  note  his  replies.  If  answers  were  given  to 
an  inquiry  of  this  nature  there  was  little  possibility  of 
evasion  or  double  dealing,  for  the  character  of  the  ques- 
tions would  prevent  it.  In  Form  20  is  given  a  form  of 
inquiry  or  reference  blank. 

This  blank  is  also  one  adopted  and  recommended  by 
the  ISTational  Association  of  Credit  Men.  It  is  the  latest 
development  of  a  series  of  inquiry  forms  prepared  by  the 
committees  on  Credit  Department  Methods  of  that  or- 
ganization, and  in  its  present  shape  represents  probably  as 
succinct  an  inquiry  blank  as  there  is  in  use  among  credit 
interests. 

This  form  is  prepared  in  the  manner  shown  in  the 
diagram :  the  same  printed  matter  which  appears  here  ap- 
pears also  on  a  duplicate  sheet  attached  to  the  form  given, 
with  the  exception  that  instead  of  the  words  "  Our  Expe- 
rience. Keep  this  for  your  files  "  there  are  the  words 
"  Return  this  to  us."  When  an  inquiry  is  to  be  made  the 
stenographer  or  other  clerk  enters  the  date,  the  name  of 
the  party  to  whom  the  inquiry  is  addressed,  a  notation 
as  to  whether  it  is  a  house  sale  or  an  order,  the  amount, 
the  name  of  the  party  inquired  about,  and  the  latter's 
post-office  address.  Below  the  double  lines  are  entered 
the  answers  showing  the  experience  of  the  inquiring 
concern;  in  sending  to  its  correspondent  this  informa- 
tion the  inquirer  is  giving  quite  as  much  as  he  expects  to 


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180  CREDIT  AND  ITS  USES 

receive;  and  when  the  recipient  returns  the  form  with  his 
information,  he  has  reaUy  given  no  more  than  he  has 
received. 

These  forms  are  in  great  demand  and  are  also  largely 
copied  either  in  their  original  form  or  with  certain  modi- 
fications, made  necessary  by  the  exigencies  of  special 
trades.  It  is  the  general  testimony  of  credit  men  that 
these  applications  for  credit  information  bring  prompt 
and  satisfactory  replies.  This  is  due  to  the  fact  that  reci- 
procity plays  a  prominent  part  in  the  transfer  of  informa- 
tion, and  the  labor  required  is  in  no  sense  an  imposition. 

In  certain  contingencies,  however,  the  nature  of  the 
inquiry  may  be  such  as  to  render  the  use  of  a  printed 
form  inexpedient.  In  its  place  should  be  sent  a  letter 
setting  forth  the  exact  nature  of  the  inquiry  and  the  in- 
formation desired.  If  the  extension  of  credit  is  to  be  con- 
ducted so  as  to  subserve  the  best  interests  of  those  en- 
gaged in  giving  credit,  it  is  essential  that  there  should  be 
perfect  freedom  in  the  interchange  of  credit  information. 

Although  the  principle  of  credit  interchange  is  recog- 
nized as  one  that  should  be  followed  by  business  houses, 
there  are  credit  men  who  feel  that  the  work  of  answering 
a  large  number  of  inquiries  is  an  imposition.  Some  dis- 
approve of  this  system  to  such  an  extent  that  they  will 
neither  make  nor  answer  inquiries.  This  policy  may  be 
followed  in  a  business  where  the  article  dealt  in  is  of  a 
patented  or  standard  character,  enabling  the  firm  to  con- 
fine its  trade  to  only  those  who  enjoy  the  highest  ratings; 
but  in  a  business  where  competition  is  general  it  is  evident 
that  such  a  policy  would  be  attended  with  disastrous 
results. 

The  information  received  on  an  approved  inquiry  form 


SOURCES  OF  CREDIT  INFORMATION  181 

must  not  be  always  accepted  at  its  face  value  but  should 
be  studied  with  the  same  care  extended  to  a  detailed 
statement  of  affairs  received  direct  from  a  customer. 
Houses  ultra-liberal  in  extending  credit  are  not  as  reliable 
guides  as  those  known  to  be  conservative.  In  other  words, 
the  character  of  the  house  giving  the  information  must 
be  considered  as  affecting  the  information  and  any  omis- 
sion to  follow  this  course  is  a  mistake.  When  inquiry 
forms  are  of  a  general  instead  of  a  detailed  character,  the 
answers  may  be  very  misleading. 

WRITTEN   AND  SIGNED  STATEMENTS 

There  are  certain  facts  which  can  be  obtained  with 
better  success  from  the  applicant  for  credit  himself  than 
from  any  other  source.  The  details  as  to  the  value  of  his 
stock  and  other  items  of  assets,  and  also  his  business 
liabilities  and  private  indebtedness  constitute  information 
of  which  he  is  the  exclusive  custodian.  It  is  essential  that 
he  be  asked  for  this  information,  and  the  safest  method 
of  securing  it  is  through  the  medium  of  a  carefully  pre- 
pared printed  form,  containing  such  questions  as  the 
creditor  has  a  right  to  ask,  signed  in  person  by  the  appli- 
cant for  credit.  The  latter  suggestion  should  be  empha- 
sized for  the  reason  that  in  some  States  it  is  impossible 
to  proceed  in  a  criminal  action  against  a  man  on  a  signed 
statement  unless  he  has  personally  signed  it.  In  many 
cases  merchants  see  fit  to  have  these  statements  signed  by 
confidential  clerks  or  buyers,  but  in  some  States  such  a 
signature  would  not  bind  the  principal.  The  great  merit 
of  securing  a  statement  upon  a  prescribed  form  is  that 
there  are  set  before  the  applicant  for  credit  or  debtor  the 
13 


182  CREDIT  AND  ITS  USES 

questions  to  be  answered,  and  his  failure  to  respond  to  any 
of  them  is  ground  for  prompt  inquiry  as  to  the  omission, 
very  often  disclosing  conditions  of  an  unfavorable  char- 
acter. If  the  purchaser  prepares  his  own  statement  he 
may,  by  clever  manipulation,  effectually  veil  unsatisfac- 
tory details  that  should  be  unfolded. 

Personal  statements  are  regarded  as  one  of  the  most 
effectual  methods  for  securing  reliable  data  in  regard  to 
accounts. 

It  is  well  to  consider  whether  a  very  large  number  of 
questions  such  as  appears  on  Form  21  does  not  confuse 
the  person  who  is  to  make  the  statement  and  also  in- 
spire an  unwillingness  on  his  part  to  submit  to  what  may 
be  regarded  as  an  inquisitorial  proceeding.  This  point 
has  been  studied  by  many  credit  departments,  with 
the  result  that  they  have  deemed  it  expedient  to 
employ  a  simpler  form,  a  type  of  which  is  shown  in 
Form  23. 

A  question  appearing  in  statement  form,  Form  21,  to 
which  attention  should  be  given,  refers  to  whether  or  not 
books  of  account  are  kept  by  the  applicant  for  credit. 
This  is  a  question  which  has  been  overlooked  to  a  great 
extent  in  the  past,  although  its  relation  to  the  bankruptcy 
law  is  one  of  such  intense  interest  that  it  is  somewhat 
remarkable  that  the  omission  was  not  discovered  earlier. 
This  question,  however,  has  been  rendered  absolutely  essen- 
tial, if  these  forms  are  to  be  used  in  the  State  of  Xew 
York,  as  certain  legislation  adopted  by  that  State  provides 
that  it  shall  be  prima  facie  evidence  of  fraud  if  a  merchant 
has  obtained  credit  on  the  strength  of  a  signed  property 
statement,  in  which  he  claims  to  keep  books  of  account, 
and  no^  making  payment  when  due,  he  fails  to  submit 


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SOURCES  OF  CREDIT  INFORMATION  183 

his  books  of  account  within  ten  days  on  the  requisition 
of  a  creditor  on  whose  account  he  has  defaulted. 

There  appears  to  be  no  uniform  policy  followed  by 
credit  departments  of  commercial  houses  or  banks  in  re- 
gard to  asking  for  property  statements.  Some  believe 
that  they  are  safe  in  depending  upon  the  information 
secured  through  other  channels  if  such  data  as  comes  to 
them  is  of  a  satisfactory  character,  and  recourse  to  a  de- 
mand for  signed  statements  is  made  onl}-  when  tlie  credit 
man  considers  that  the  general  information  he  has  secured 
is  not  adequate.     As  explained  in  the  following  opinion: 

"In  case  of  any  discrepancy  between  the  reports  of  the  two 
mercantile  agencies,  or  where  the  reports  have  been  vague  and 
unsatisfactory;  as  for  instance  when  the  report  reads,  'It  is  re-ported 
that  this  party  owns  a  certain  amount  of  real  estate  in  his  own 
name,'  we  have  usually  required  the  customer  to  furnish  us  a  state- 
ment which  we  have  verified  by  records." 

Some  credit  men  are  not  in  the  habit  of  asking  for 
property  statements  except  in  the  case  of  an  entirely  new 
account,  while  others  do  not  request  property  statements 
at  all  if  they  feel  that  they  can  get  along  without  them. 
The  situation  in  commercial  circles  on  this  point  is  exactly 
the  same  as  in  the  banking  community,  viz.,  as  a  rule  men 
are  not  inclined  to  give  statements  of  their  affairs  if  they 
can  avoid  doing  so.  The  lack  of  uniform  procedure  on 
this  as  on  many  other  points  shows  that  there  is  still 
considerable  work  to  be  done  in  credit  organizations  if  the 
business  of  the  country  is  to  be  reduced  to  the  safe  basis 
upon  which  it  should  rest.  Another  advantage  in  using 
property  statements  is  as  shown  in  the  following  opinion, 
which  is  from  a  credit  man  of  excellent  training  and  long 
experience : 


184  CREDIT  AND  ITS  USES 

"  We  insist  on  signed  statements  from  the  majority  of  our  cus- 
tomers at  least  once  a  year,  and  iu  many  cases  twice,  or  at  least  we 
require  to  know  at  the  half  year  as  to  their  indebtedness.  This  is  a 
good  thing  for  the  customer  as  well  as  ourselves.  The  oftener  he 
can  look  the  facts  as  to  his  condition  in  the  face,  the  better.  The 
country  merchant  generally  is  not  very  systematic  in  his  accounting. 
A  large  number  of  the  statements  we  get  are  taken  on  the  ground  by 
a  representative  from  our  office,  who  can  at  the  time  discuss  and 
advise  regarding  the  various  features." 

In  analyzing  statements  it  should  be  borne  in  mind 
that,  under  scrutiny  and  the  liberal  use  of  the  blue  pencil, 
often  items  which  seem  most  roseate  at  first  sight  dis- 
appear as  factors  when  subjected  to  a  process  of  analytical 
reduction.  The  quick  or  realizable  assets  must  be  sep- 
arated from  those  which  are  slow  and  unproductive ;  for 
upon  the  former  depend  the  receipts  to  sustain  the  business. 
When  making  a  statement  a  man  will  naturally  place  the 
largest  possible  valuation  upon  his  belongings.  He  does 
this  believing  that  the  merchandise  and  accounts  are  worth 
"  that  much  "  to  him,  but  when  these  items  of  assets  are 
weighed  in  the  scales  of  impartial  judgment  they  shrink 
appreciably.  In  addition,  there  are  items  appearing  in 
nearly  all  statements  made  by  firms  and  individuals  which 
must  be  considered  at  only  a  certain  value.  For  instance, 
every  State  has  its  exemption  laws,  and  the  citizen  is 
entitled  to  his  exemptions.  It  not  infrequently  happens 
that  a  house  and  lot  entered  in  a  statement  as  an  asset, 
presumably  at  the  risk  of  the  business,  are  claimed  as  an 
exemption  when  a  failure  occurs,  and  in  localities  where 
there  is  a  personal  property  exemption,  if  the  debtor  elects 
to  claim  his  exemption  he  can  take  a  portion  of  his  stock, 
and  invariably  gets  the  best  portion. 


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SOURCES  OP  CREDIT  INFORMATION  185 

ORAL  INVESTIGATIONS 

In  no  field  of  credit  information  are  better  results  se- 
cured than  through  the  instrumentality  of  oral  investiga- 
tions. The  latter  are  necessarily  confined  to  inquiries  and 
researches  among  concerns  residing  in  the  same  city  as 
the  house  pursuing  the  investigation.  In  large  cities  this 
character  of  credit  information  is  industriously  sought 
and  secured  in  a  volume  which  represents  probably  a 
larger  return  for  the  time,  labor,  and  expense  involved 
than  any  other  method  of  investigation  followed  by  credit 
departments. 

Such  investigations  are  conducted  by  clerks  represent- 
ing the  credit  department  of  a  house,  who  carry  a  list  of 
the  persons  that  are  subjects  of  inquiry,  and  who  visit  all 
business  concerns  to  whom  the  person  inquired  about  may 
have  referred.  Quite  as  important,  they  must  visit  houses 
in  the  same  trade  and  every  other  house  that  might  by 
any  possibility  be  possessed  of  information  which  would 
affect  the  standing  and  responsibility  of  the  concern  under 
investigation.  It  is  well  to  consult  personal  as  well  as 
business  friends  of  the  man  seeking  credit,  for  from  the 
former  may  be  gleaned  information  concerning  his  personal 
habits  and  mode  of  living,  which  will  be  of  gi'eat  assistance 
to  the  credit  man.  Prominent  credit  men  have  admitted 
that  they  have  been  saved  from  serious  losses  by  insist- 
ing upon  the  settlement  of  accounts  when  information 
showing  personal  deficiencies  came  to  their  attention.  The 
clerks  to  whom  this  work  is  intrusted  usually  represent  the 
minor  help  in  the  credit  departments;  and  investigating 
work  is  the  apprentice  period  of  those  employed  in  credit 
offices. 


186  CREDIT  AND  ITS  USES 

The  investigator  is  expected  to  frame  his  own  ques' 
tions,  and  the  character  of  those  questions  will  determine 
the  nature  of  the  information  he  will  elicit.  The  inter- 
ested and  watchful  investigator  will  very  quicldy  discern 
whether  the  credit  man,  to  whom  his  questions  are  ad- 
dressed, is  answering  them  in  a  straightforward  manner, 
or  whether  he  is  endeavoring  to  conceal  anything. 

The  credit  investigator  is  to  commerce  what  the  re- 
porter is  to  journalism.  They  discharge  similar  duties  in 
their  respective  fields  of  labor.  The  expense  involved  in 
retaining  in  the  service  trained  and  competent  investi- 
gators disparages  the  possibility  of  using  them  generally 
outside  the  cities  in  which  their  employers  do  business, 
as  there  would  be  added  to  the  salary  list  the  expense  of 
traveling.  The  merit  of  this  mode  of  investigation  has 
led  to  the  employment  of  credit  men,  who  travel  in  quest 
of  credit  information  throughout  the  territories  in  which 
their  houses  principally  operate.  This  will  be  explained 
in  the  next  section. 

TRAVELING    CREDIT    REPRESENTATIVES    AND     SPECIAL 

REPORTS 

Credit  reporting,  through  traveling  representatives  of 
credit  departments,  is  an  advanced  form  of  credit  work 
made  necessary  by  the  large  number  of  accounts  appearing 
upon  the  books  of  wholesale  and  jobbing  houses,  and  the 
further  necessity  of  exercising  a  careful  supervision  of 
certain  accounts  that  may  show  a  tendency  to  lag  in  pay- 
ments or  display  other  symptoms  of  commercial  weakness. 
It  has  become  the  custom,  however,  on  the  part  of  houses 
extending  liberal  lines  of  credit,  to  utilize  the  services  of 
traveling  credit  men  in  visiting  all  classes  of  trade,  and 


SOURCES  OF  CREDIT  INFORMATION  187 

in  fact  making  a  thorough  investigation  of  every  concern 
within  their  territory. 

The  traveling  representative  fulfills  in  a  much  more 
important  capacity,  and  to  a  greater  degree,  the  functions 
described  in  the  foregoing  section  as  belonging  to  credit 
investigators.  The  principle  upon  which  he  works  is 
exactly  the  same,  although  the  detailed  results  of  his  efforts 
must  represent  a  great  deal  more  to  his  firm  than  is  ex- 
pected from  the  local  investigator.  A  man  is  not  qualified 
to  act  in  the  capacity  of  traveling  credit  representative 
unless  he  has  had  a  thorough  schooling  in  credit  work  in 
all  its  branches,  for  the  reason  that  the  work  he  is  called 
upon  to  do  covers  nearly  every  phase  of  credit  economy. 
His  judgment  is  required  by  his  employer  as  to  every 
question  that  enters  into  the  life  of  an  account  or  credit, 
and  unless  he  has  had  the  requisite  experience  he  cannot 
meet  the  requirements  of  his  position.  When  a  traveling 
credit  representative  leaves  on  a  trip  he  carries  with  him 
a  record  of  some  description  providing  him  with  the  essen- 
tial facts  in  relation  to  the  people  he  intends  to  call  upon. 
Quite  as  important,  he  must  have  a  general  knowledge  of 
the  different  accounts  kept  with  his  house  by  the  people 
he  purposes  to  investigate  and  interview.  He  must  also 
have  a  reasonable  understanding  of  the  characteristics  of 
the  customers  of  his  concern,  otherwise  he  cannot  approach 
or  "  handle  "  them  with  the  tact  which  is  extremely  neces- 
sary in  his  field  of  labor.  His  work  consists  not  simply  in 
visiting  the  customer,  having  a  talk  with  him  in  regard  to 
his  business,  and  asking  for  a  statement  of  his  affairs.  It 
extends  to  making  an  examination  of  the  customer's  books 
if  the  necessity  for  so  doing  should  develop,  and  also  look- 
ing through  the  stock  of  merchandise  in  order  to  determine 


188  CREDIT   AND  ITS  USES 

in  what  condition  it  may  be.  Having  made  a  critical  an- 
alysis of  the  books  and  merchandise,  he  must  then  make 
such  further  investigations  among  the  banks,  mercantile 
agencies,  and  other  authorities  as  he  deems  advisable.  One 
of  the  duties  to  v^^hich  reference  has  been  made  would  ap- 
pear to  call  for  special  attention,  and  that  is  the  question 
of  the  credit  man  making  an  examination  of  the  customer's 
books.  This  would  presuppose  an  expert  knowledge  of 
bookkeeping,  or,  as  it  is  called,  "  accounting."  Some  credit 
men  and  writers  on  credit  topics  have  gone  so  far  as  to  con- 
tend that  a  credit  man's  professional  equipment  is  not  com- 
plete unless  he  be  an  accountant.  Many  of  the  ablest 
credit  men  in  the  country  are  not  accountants,  expert  or 
otherwise,  and  this  fact  does  not  detract  from  their  great 
ability  as  credit  men  and  successful  administrators  of  the 
credit  office.  There  is  no  disposition  to  scoff  at  or  dis- 
courage a  thorough  knowledge  of  bookkeeping  on  the  part 
of  credit  men ;  on  the  contrary,  it  is  a  study  that  could  be 
undertaken  with  profit  by  all  interested  in  credit  work. 

Among  the  advantages  accruing  to  a  house  through  the 
employment  of  traveling  credit  representatives  is  its  ability 
to  secure  from  him  an  opinion  as  to  the  local  conditions 
surrounding  people  whom  they  are  trusting.  At  times  de- 
pressions will  affect  localities  that  have  formerly  been  quite 
prosperous.  Untoward  local  conditions  can  sometimes  be 
foreseen  through  investigation  in  the  locality,  and  this  is 
one  of  the  respects  in  which  the  work  of  a  traveling  credit 
representative  is  most  efficacious. 

In  some  cases,  especially  when  the  amount  involved 
is  a  large  one  and  the  information  obtained  is  not  of  a 
decisive  character  either  favorable  or  otherwise,  it  is  advis- 
able to  procure  a  special  report.    This  can  be  done  through 


SOURCES  OF  CREDIT  INFORMATION  189 

the  mercantile  agencies,  good  law  firms,  or  both,  the  credit 
man  explaining,  when  making  the  request  for  the  special 
report,  the  exact  details  he  would  like  to  have  covered, 
and  the  points  in  which  he  is  most  interested.  Where  a 
house  can  afford  to  do  so,  however,  these  are  the  cases 
which  should  be  intrusted  to  traveling  credit  representa- 
tives, for  the  latter  are  better  informed  as  to  the  nature 
of  the  difficulty  in  each  case,  and  their  knowledge  of  credit 
work  enables  them  to  reach  and  act  upon  the  vital  points 
involved  in  a  manner  in  which  an  outsider  could  not  con- 
duct the  required  investigation. 


CHAPTER    XI 

SOURCES    or    CREDIT    INFORMATION — Continued 

(C)  The  Mercantile  Agency 

The  best  known  and  in  some  respects  the  most  im- 
portant fountain  of  credit  information  is  the  mercantile 
agency.  The  two  institutions  that  contribute  the  bulk 
of  mercantile-agency  service  are  often  referred  to  as  in- 
dispensable elements  in  the  determination  of  the  extension 
of  credits.  Fifteen  or  twenty  years  ago  the  assertion 
as  to  their  indispensability  would  have  passed  unques- 
tioned, but  such  is  not  the  case  to-day.  The  fact  that  the 
mercantile  agencies  diffuse  a  great  mass  of  credit  informa- 
tion leads  people  to  believe  that  it  would  be  impossible  to 
dispense  with  the  services  of  these  companies.  Those  in 
the  mercantile-agency  business  make  a  special  point  of 
this,  and  press  it  at  every  opportunity.  Among  credit  men, 
however,  there  is  a  distinct  feeling  that  while  mercantile- 
agency  service  is  valuable,  it  is  not  indispensable.  In  fact, 
credit  representatives  of  important  establishments  incline 
to  the  opinion  that,  compared  with  other  classes  of  credit 
information,  it  is  of  a  secondary  character.  There  are 
special  agencies  organized  to  report  certain  trades,  the 
work  of  which  is  so  thorough,  especially  in  regard  to  ledger 
information,  that  it  is  looked  upon  as  superior  to  the  aver- 
age mercantile-agency  service.  The  following  opinion  of 
190 


SOURCES  OF  CREDIT  INFORMATION  191 

a  leading  credit   man  of  New   York   City   reflects   this 
sentiment : 

"My  personal  opinion  with  regard  to  credit  matters  as  a  whole 
is  that  while  such  concerns  as  Dun  and  Bradstreet  may,  perhaps, 
always  be,  to  a  certain  extent,  of  value,  I  am  convinced  that  their 
value  is  daily  becoming  less  and  less  in  proportion  to  the  increase 
in  population  and  therefore  the  increase  in  business  houses.  I 
believe  that  credit  bureaus  are  the  most  desirable  means  of  acquiring 
credit  information,  not  only  because  one  can  get  (if  these  bureaus 
are  properly  managed)  practically  the  same  information  that  Dun 
and  Bradstreet  do — by  means  of  communicating  with  local  attorneys 
— but  because  they  give  from  day  to  day  the  exact  indebtedness 
in  each  trade  of  the  person  or  house  seeking  credit,  barring,  of 
course,  banking  indebtedness." 

This  criticism  will  be  regarded  as  having  its  inspira- 
tion in  the  failure  of  mercantile  agencies  to  extend  their 
system  of  acquiring  trade  information  to  the  limits  desired 
by  credit  men,  but  it  is  obvious  that  other  and  quite  as 
compelling  motives  have  aroused  unfavorable  views  of 
agency  service. 

In  estimating  the  value  of  mercantile-agency  informa- 
tion, credit  men  often  labor  under  the  error  that  the  mer- 
cantile agency  should  provide  information  that  will  in 
itself  determine  whether  or  not  an  account  should  be 
opened  or  continued.  To  place  upon  agency  reports  the 
dependence  involved  in  this  idea  would  be  relinquishing 
the  deciding  voice  to  outside  institutions,  which,  although 
well  organized,  are  subject  to  the  same  fallibility  as  any 
other  human  individual  or  institution.  The  agency  traces 
the  business  experience  and  antecedents  of  a  person  in 
trade;  acquaints  itself  with  the  facts  in  regard  to  his 
character ;  learns  from  others  his  general  reputation,  both 
in  a  personal  and  business  sense  j  investigates  his  means 


192  CREDIT  AND  ITS  USES 

and  the  extent  of  his  business;  and  should  also  direct  its 
energies  to  determining  the  standing  of  the  man  with 
those  who  sell  to  him ;  the  latter  duty  referring  to  trade 
information  or  ledger  experience,  which  has  become  a 
special  branch  of  credit  reporting. 

One  of  the  great  advantages  of  agency  information  is 
its  use  in  corroborating  other  information  at  the  disposal 
of  the  credit  department.  It  serves  to  verify  entries  con- 
tained in  a  personally  signed  statement.  It  is  useful  in 
affording  the  credit  man  an  idea  as  to  the  character  of 
the  applicant  for  credit;  and  a  well-tJiougld-out  agency 
report  should  aid  him  materially  in  forming  his  own  judg- 
ment as  to  the  risk  to  be  undertaken.  Credit-givers  com- 
plain that  in  some  cases  they  have  been  misled  by  agency 
information,  and  while  this  may  be  true,  it  will  very  often 
be  found  that  the  trouble  arose  from  reposing  too  much 
faith  in  generalities  without  resorting  to  such  methods  of 
confirming  the  reports  as  are  at  hand  in  every  well- 
equipped  credit  office. 

The  mercantile  agency  movement  had  its  origin  in  the 
organization  of  Messrs.  E.  G.  Dun  &  Co.,  although  in  its 
first  years  the  name  by  which  it  is  now  known  throughout 
the  world  was  not  connected  with  it.  A  reliable  authority, 
in  speaking  of  the  mercantile  agency,  says  that  "  It  orig- 
inated in  the  United  States  during  the  period  of  depres- 
sion following  the  panic  of  1837,  and  its  avowed  object 
was  to  uphold,  extend,  and  render  safe  and  profitable  to 
all  concerned,  the  great  credit  system  which  had  gro\m 
up  with  the  increase  of  commerce.  The  first  mercantile 
agency  was  established  in  Xew  York,  during  the  year  1841, 
by  Lewis  Tappan."  In  his  work  on  "  Giving  and  Getting 
Credit,"  Mr.  Fred.  B.  Goddard  says: 


SOURCES  OF  CREDIT  INFORMATION  193 

"The  business  of  the  agency  was  at  6rst  limited;  but  in  1846, 
Mr.  Benjamin  Douglass  was  admitted  to  a  partnership  with  Lewis 
Tappan,  under  the  style  of  Tappan  &  Douglass,  and  he  at  once 
assumed  the  chief  management  and  extended  its  operations.  In 
1854,  Mr.  Douglass  succeeded  to  the  business,  and  the  style  of  B. 
Douglass  &  Co.  was  adopted,  with  the  admission  of  Mr.  Robert 
Graliam  Dun.  '  The  Mercantile  Agency '  now  made  rapid  and  sub- 
stantial progress,  and  soon  gained  a  recognized  and  assured  position 
among  the  useful  and  necessary  mercantile  institutions  of  the 
country.  In  1860  Mr.  Douglass  withdrew,  and  ever  since  that 
time  Mr.  Dun's  name  remained  at  the  head  of  the  agency." 

The  foundation  of  The  Bradstreet  Co.  took  place  some 
years  subsequent  to  that  of  ]\Iessi's.  R.  G.  Dun  &  Co.  In 
a  paper  on  "  Credit — Its  Meaning  and  Moment,"  written 
by  ]\Ir.  Clarlc  W.  Bryan,  editor  and  proprietor  of  the 
Paper  World  and  Manufacturer,  and  published  in  1883 
(Bradstreet  Press),  he  gives  some  facts  in  regard  to  the 
earliest  history  of  this  institution.  It  appears  that  in 
1848  Mr.  John  M.  Bradstreet,  a  lawyer  of  Cincinnati, 
had  charge  of  a  certain  insolvent  estate.  His  work  in 
connection  with  it  was  evidently  an  extensive  one,  during 
which  he  became  familiar  with  the  standing  of  bankers 
and  others  in  and  around  Cincinnati.  He  was  also  brought 
into  close  relations  with  prominent  New  York  interests, 
and  this  combination  of  circumstances  suggested  to  him 
the  advisability  of  making  arrangements  with  his  New 
York  connections  to  furnish  them  with  information  re- 
lating to  their  "Western  customers.  He  was  successful  in 
carrying  out  his  plans,  and  in  1849  "  Bradstreet's  Inv 
proved  Mercantile  Agency  "  was  opened.  Henry  Brad- 
street, a  son  of  John  M.  Bradstreet,  afterwards  became 
associated  with  the  business,  and  the  style  was  changed  to 
J.  M.  Bradstreet  &  Co.     J.  M.  Bradstreet  died  in  1863, 


194  CREDIT  AND  ITS  USES 

and  in  1876  the  concern  was  incorporated  as  "  The  Brad- 
street  Co."  Mr.  Charles  Finney  Clark,  who,  until  his 
death  in  1904,  had  been  for  many  years  the  president  of 
this  company,  became  connected  with  it  in  its  early  days 
and  to  his  genius  and  untiring  energy  are  due  the  influ- 
ence and  prominence  of  the  concern.  Following  closely 
upon  the  organization  of  the  business  started  by  Lewis 
Tappan,  were  several  similar  enterprises,  none  of  which, 
however,  has  survived.  The  fact  of  the  failure  of  other 
attempts  to  successfully  develop  mercantile  agencies  has 
given  to  the  Dun  and  Bradstreet  companies  a  reputation 
for  solidity  and  superiority  that  accounts  to  a  great  extent 
for  the  fame  and  prestige  they  have  enjoyed  for  so  many 
years. 

The  scope  and  influence  of  mercantile-agency  work 
advanced  very  rapidly,  and  the  disposition  of  the  leading 
companies  to  extend  the  field  of  their  operations  in  accord- 
ance with  the  requirements  of  the  mercantile  community 
created  a  strong  sentiment  in  their  favor  and  proved  a 
profitable  policy  to  the  agencieg.  The  development  of  these 
organizations  is  worthy  of  much  praise,  and  has  proved 
a  boon  to  the  business  man,  enabling  him  to  obtain  in- 
formation in  almost  any  part  of  the  world  within  a  short 
space  of  time.  They  have  traversed  every  section  of  our 
own  territory,  and  established  either  branches  of  their 
own  or  adequate  connections  with  other  avenues  of  in- 
formation in  the  Old  World.  The  part  that  the  mercantile 
agencies  have  played  in  the  upbuilding  of  the  commercial 
structure  should  not  be  overlooked.  As  explained  in  the 
discussion  of  commercial  credit,  in  a  new  and  crude  com^ 
munity,  there  is  a  great  demand  for  credit,  and  the  will- 
ingness  of  the  merchants  of  the  older  localities  to  extend 


SOURCES  OP  CREDIT  INFORMATION  195 

credit  to  pioneers  has  been  regulated  and  assisted  by 
the  operations  of  the  mercantile  agencies.  Even  if  the 
information  acquired  by  them  was  meager,  they  had  the 
prescience  to  either  send  to  or  secure  representatives  in 
new  sections,  who  advised  them  with  a  fair  degree  of  in- 
telligence and  integrity  as  to  the  character  and  capacity 
of  credit  seekers.  This  information,  when  sent  through- 
out the  business  world  with  the  name  of  either  of  these 
great  companies  as  a  quasi  guarantee  of  its  correctness,  has 
exercised  an  influence  of  incalculable  value  in  developing 
the  commercial  progress  of  the  last  fifty  years. 

Another  feature  of  the  work  of  these  companies  which 
has  helped  to  establish  their  names,  as  well  as  the  assumed 
reliability  of  anything  which  proceeded  from  them,  was 
the  review  of  trade  conditions  and  market  information 
they  have  distributed  weekly  for  many  years.  This  infor- 
mation continues  to  be  accepted  by  the  press  of  the  country 
as  probably  the  best  authenticated  index  of  financial  and 
industrial  conditions  that  could  be  consulted.  The  ac- 
quirement of  this  information,  from  the  many  different 
points  of  trade  activity,  has  imposed  upon  the  agencies 
considerable  expense  and  labor.  That  they  recognize  in 
the  transmission  of  this  information  a  powerful  help  to 
their  own  advancement  does  not  detract  from  the  merit 
of  the  service  they  have  rendered.  The  transfusion  of  gen- 
eral information  and  data  showing  the  condition  of  affairs 
in  different  markets  has  also  been  of  great  assistance  to 
business  men  in  shaping  their  own  plans,  and  especially 
in  measuring  credit  conditions. 

Credit  men  frequently  express  opinions  to  the  effect 
that  the  service  of  the  agencies  is  not  as  prompt  as  it  should 
be ;  that  they  find  it  necessary  to  check  the  regular  agencies 


196  CREDIT  AND  ITS  USES 

by  attorneys'  reports;  that  where  quick  service  is  required 
they  avail  themselves  of  the  facilities  furnished  by  special 
and  trade  agencies;  that  neither  of  the  agencies  comes  up 
to  requirements ;  and  that  special  agencies  are  much  more 
efficacious.  Mr.  James  II.  Eckels,  president  of  the  Com- 
mercial National  Bank  of  Chicago,  said  in  his  lecture  on 
"  The  Methods  of  Banking,"  before  the  University  of 
Chicago : 

"At  present  the  banks  must  rely  to  some  extent  at  least,  on  the 
mercantile  agencies  for  information  on  the  status  of  men  engaged 
in  business;  but  these  reports  have  been  found  deficient  in  that 
they  are  so  general  in  character  and  so  limited  in  giving  the  informa- 
tion which  is  essential  to  forming  a  judgment  as  to  the  extension  of 
credit." 

Those  who  have  been  associated  with  the  organized 
credit  movements  as  they  have  existed  are  cognizant  tlat 
there  is  a  demand  for  a  greater  discrimination  in  ratings, 
and  that  additional  characters  to  those  already  used  should 
be  employed  to  designate  not  only  the  credit  standing  and 
approximate  means  of  the  person  rated,  but  liis  paying 
qualities  as  well.  The  most  important  element  of  dis- 
approval of  present  agency  methods  is  the  failure  to  re- 
spond to  the  ever-increasing  demand  for  ledger  informa- 
tion or  trade  information.  It  should  not  be  presumed  that 
because  one  calls  attention  to  certain  palpable  and  undeni- 
able facts,  that  he  is  necessarily  an  unfriendly  critic.  It 
is  required  when  stating  a  case  to  state  it  all ;  some  of  the 
charges  against  agency  service  are  sound  and  some  are 
not;  at  least,  this  is  the  judgment  of  the  writer. 

(1)  In  respect  to  delays  in  service:  These  delays  are 
in  many  cases  due  to  a  desire  on  the  part  of  the  agency 
representative  to  furnish  a  report  that  will  be  one  re- 


SOURCES  OF  CREDIT  INFORMATION  197 

fleeting  that  "  greater  accuracy  "  that  the  credit  men  are 
looking  for.  In  a  recent  publication  on  credit,  it  was 
stated  that  one  day  was  all  the  time  required  in  which  to 
prepare  a  good  agency  report.  There  are  some  reports  that 
can  be  prepared  in  one  day  and  others  that  cannot.  There 
can  be  no  arbitrary  time  limit  established  or  successfully 
defended  for  the  preparation  of  an  agency  report. 

Agency  work  is  prompt  if  it  be  executed  with  that 
reasonable  expedition  that  admits  of  full  attention  to  all 
the  necessities  of  each  individual  case ;  delay,  so  called, 
is  sometimes  in  the  direct  interest  of  the  credit-giver,  as 
it  may  provide  him  with  data  that  fictitious  promptness 
Would  not  have  supplied. 

(2)  Regarding  the  express  necessity  of  checking 
agency  reports  by  attorneys'  reports:  Corroboration  of 
every  kind  is  an  element  of  good  credit  office  management, 
and  the  method  suggested  could  be  resorted  to  with  profit, 
even  if  there  existed  no  doubt  as  to  the  correctness  of 
agency  information;  while  a  resort  to  generalization  on 
the  part  of  the  agencies  is  not  commended,  it  must  be 
conceded  that  in  the  preparation  and  editing  of  the  volumi- 
nous matter  that  proceeds  from  the  agency  offices,  there 
must  of  necessity  be  a  condensation  of  the  data  on  which 
the  report  is  based.  On  the  other  hand  some  la^vyers  give 
very  satisfactory  information^  and  set  out  all  the  features 
of  their  reports  in  more  detailed  form  than  would  appear 
in  the  average  agency  report.  This  exhibition  of  detail 
might  lead  to  the  belief  that  the  attorney's  report  in  such 
a  case  was  of  more  value  than  the  agency  report,  although 
the  sum  of  the  information  might  be  exactly  the  same. 
It  often  occurs  that  the  attorney  who  acts  directly  for  the 
credit  department  is  also  the  representative  of  a  certain 
U 


198  CREDIT  AND  ITS  USES 

large  agency,   and  in  this  case  there  would  be  no  real 
corroboration. 

(3)  As  to  the  claimed  superiority  in  promptitude  and 
general  service  of  special  agencies  over  the  mercantile 
agencies;  it  is  well  known  that  many  of  these  special 
agencies  are  organized  by  trades  or  business  communities 
for  their  own  protection,  and  even  when  not  organized 
by  the  business  men  themselves,  they  are  in  the  control 
of  people  who  are  conceded  special  advantages  in  the  pro- 
curement of  information  by  the  different  trades.  Other 
special  agencies  are  conducted  on  cooperative  lines,  and 
are  enabled  to  get  information  in  more  detailed  form  than 
it  is  extended  to  the  regular  agencies. 

(4)  Criticisms  have  been  leveled  at  the  agencies  for 
their  lack  of  detail,  and  especially  in  respect  to  statements 
(signed  or  otherwise).  The  influence  of  the  mercantile 
agencies  is  recognized  by  all  classes  as  being  a  most  im- 
portant one.  Among  the  intelligent  of  those  who  seek 
credit  there  is  reasonable  appreciation  of  the  necessity  of 
complying  with  the  requests  of  the  agencies,  and  thereby 
assuring  a  rating  and  report  that  will  be  an  honest  reflec- 
tion of  the  standing  of  the  merchant.  There  are  at  the 
same  time  a  very  large  number  of  people  who  regard  the 
work  of  the  agencies  as  being  a  spying  process  to  which 
they  should  not  be  subjected,  and  among  this  class  there  is 
a  distinct  unwillingness  to  comply  with  such  requests  as 
the  agencies  may  make.  It  is  sometimes  difficult  for  an 
agency  man  to  induce  a  merchant  to  talk  even  in  a  general 
way  in  regard  to  his  affairs,  and  in  such  a  case  it  is  much 
harder  to  induce  the  merchant  to  give  to  the  agency  a  de- 
tailed written  and  signed  statement  of  his  affairs.  He  does 
not  regard  this  as  a  necessity,  and  very  often  replies  that 


SOURCES  OF  CREDIT  INFORMATION  199 

he  can  get  all  the  credit  he  wants  without  the  help  of  the 
agency  and  cares  nothing  for  its  rating.  How  far  the 
agency  should  be  criticised  for  its  failure  to  secure  state- 
ments from  people  of  this  class  (a  very  numerous  one)  is  a 
question  to  which  patrons  of  the  agencies  probably  do  not 
give  sufficient  consideration.  If  a  man  is  seeking  credit 
he  is  likely  to  comply  with  a  demand  from  a  creditor  for 
a  statement,  rather  than  from  the  agency,  whose  desire 
to  give  him  a  rating  he  ascribes  more  to  its  wish  to  make 
money  than  from  any  relation  the  agency  bears  to  com- 
mercial life. 

An  investigation  made  in  the  year  1902  showed  that 
about  374  per  cent  of  the  reports  submitted  by  the  agencies 
contained  statements  secured  from  people  in  trade.  There 
are  a  great  many  from  whom  it  would  be  a  waste  of  time 
to  solicit  statements,  and  idle  to  consider  them  if  obtained, 
such  as  people  of  small  means,  saloon  keepers,  newsdealers, 
milliners,  and  others,  whose  unfamiliarity  with  business 
methods  is  self-evident.  These  small  dealers  constitute 
quite  a  percentage  of  the  aggregate  of  those  in  business 
and  must  be  eliminated  from  the  number  of  those  from 
whom  statements  should  be  secured.  Therefore  the  dif- 
ference between  the  37|  per  cent  mentioned  and  the  maxi- 
mum of  100  per  cent  does  not  represent  a  deficiency  in 
agency  work,  as  some  might  be  led  to  suppose.  The  prac- 
tice of  giving  statements  of  one's  affairs  is  more  general 
than  it  used  to  be,  and  the  agencies  are  getting  the  benefit 
of  this  progress  and  show  it  in  the  class  of  reports  they 
are  issuing.  This  argument,  however,  does  not  account 
entirely  for  the  alleged  deficiencies  in  reports  and  absence 
of  accuracy.  The  latter  conditions  are  traceable  to  the 
fact  that  many  agency  representatives  and  reporters  have 


200  CREDIT   AND   ITS   USES 

had  little  if  any  commercial  training,  and  really  do  not 
understand  the  scope  of  latter-day  credit  information. 

(5)  The  demand  for  additional  significations  as  to  the 
capital  and  credit  standing  and  paying  qualities  of  business 
people:  This  refers  to  the  ratings  appearing  in  the  ref- 
erence books  of  the  agencies,  and  is  a  question  which  has 
been  agitated  for  some  years  by  certain  credit  men.  This 
idea  has  been  approved  by  the  credit  organizations,  and 
the  agencies  have  been  urged  to  incorporate  this  change 
in  their  reference  books. 

The  object  sought  is  to  have  the  agencies  designate  in 
the  rating  column,  in  addition  to  the  approximate  capital 
of  the  trader  and  his  credit  standing,  the  nature  of  his 
paying  qualities;  a  man  may  be  in  good  credit,  that  is,  he 
may  be  able  to  command  such  credit  as  he  requires,  but 
at  the  same  time  may  be  backward  and  unsatisfactory  in 
his  payments.  In  order,  therefore,  that  the  subscriber  may 
know  by  glancing  at  the  rating  column  just  what  a  man's 
capital,  credit  standing,  and  paying  qualities  are,  the  agen- 
cies are  expected  to  designate  the  relative  degree  of  all 
of  them. 

The  motive  of  this  demand  is  that  the  reference  books 
alone  should  give  sufficient  information  upon  which  to 
stake  a  credit.  The  agencies  should  not  be  expected  to 
undertake  the  labor  and  expense  of  securing  the  material 
for  their  reports  solely  to  furnish  ratings;  the  latter  are 
guides  only,  and  when  expected  to  fulfill  any  more  im- 
portant function,  a  wase  dependence  on  credit  information 
has  been  abandoned. 

The  refusal  of  the  agencies  to  comply  with  the  views 
of  credit  men  in  this  particular  impelled  two  recently 
formed  (but  now  extinct)  agencies  to  adopt  this  feature 


SOURCES  OF  CREDIT  INFORMATION  201 

in  tlie  liope  of  profiting  by  any  displeasure  tlie  old  agencies 
may  have  incurred.  But  unless  it  can  be  shown  that  "  pay 
ratings  "  are  based  upon  a  thorough  preliminary  investi- 
gation and  frequent  re-investigations,  pay-rating  designa- 
tions are  not  to  be  relied  upon.  A  man's  methods  of  pay- 
ment are,  as  has  been  said,  of  a  varying  nature;  what 
is  considered  prompt  pay  in  one  trade  is  not  quick  pay- 
ment in  another,  for  the  terms  of  settlement  widely  differ. 
A  man  may  discount  his  bills  one  season  when  money  to 
move  the  crops  has  flowed  easily,  and  the  next  year  be 
compelled  to  take  full  time,  and  it  may  be  long  time. 
His  capital  and  credit  standing  may  not  be  affected,  but 
his  habit  of  payment  has  changed;  this  would  require  a 
change  in  his  pay  rating;  a  lowering  of  that  rating  would 
provoke  unnecessary  alarm  and  probably  do  him  a  great 
deal  of  harm.  Further,  the  ratings  must  be  based  on  re- 
visions that  have  been  made  several  months  prior  to  the 
time  the  books  go  to  press.  It  will  be  said  that  the  re^ 
ports  are  just  as  old;  true,  but  the  reports  can  be  revised 
quickly  and  changes  noted,  whereas  an  entirely  neiu  hook 
cannot  be  printed  every  month. 

Further,  the  wisdom  of  pay  ratings  is  open  to  serious 
question.  It  is  well  known  that  a  man  may  discount  his 
bills  with  a  certain  class  of  houses,  take  full  time  with 
others,  and  be  slow  with  others.  It  is  often  difficult  to 
draw  a  medium  or  average  impression  as  to  this  man's 
paying  qualities. 

The  two  principal  features  in  which  improvement  in 
mercantile-agency  service  is  sought  are  a  closer  attention 
to  the  essential  elements  of  reports  and  the  institution  of 
a  bureau  for  the  acquirement  and  dissemination  of  trade 


202  CREDIT  AND  ITS  USES 

information;  and  they  are  subjects  challenging  the  efforts 
of  the  best  talent  in  the  agency  business.  The  respects 
in  which  reports  are  susceptible  to  improvement  are  con- 
tained in  the  idea  of  a  wider  comprehension  of  the  present 
demands  of  the  credit  department.  The  reporter  should 
be  schooled  in  the  present  accepted  ideas  of  commercial 
credit,  and  the  character  of  the  reports  desired  is  that 
which  a  competent  traveling  credit  representative  would 
prepare  after  a  careful  study  of  a  case.  When  reports 
do  not  reach  this  standard  the  agencies  suffer,  and  one  of 
their  principal  duties  is  to  educate  their  representatives 
in  respect  to  current  requirements. 

The  agencies  have  been  urged  time  and  again  to  insti- 
tute a  thorough  system  for  the  interchange  of  trade  or 
ledger  information.  The  fact  that  they  have  not  done  so 
may  be  due  to  the  fear  that  the  business  would  not  prove 
a  profitable  one.  The  facilities  possessed  by  the  agencies 
for  doing  this  work  give  them  a  marked  advantage  over 
other  concerns  who  undertake  to  do  it,  and  their  services 
would  be  the  more  desirable  on  that  account  and  would 
assure  them  of  undoubted  support. 

One  of  the  principles  upon  w^hich  credit  interchange 
is  based  is  that  of  reciprocity;  in  other  words,  if  a  man 
contributes  to  the  fund  of  information  upon  a  credit  risk 
he  should  be  entitled  to  receive  some  information  in  return 
for  that  which  he  has  given. 

There  is  no  reason  why  the  agencies,  if  they  should 
undertake  to  secure  trade  information  in  the  same  effect- 
ive way  that  others  have,  should  not  "  make  it  an  object 
to  credit  departments  to  freely  confer  with  them  and  give 
them  full  facts  and  figures." 


CHAPTER   XII 

SOURCES   OF   CEEDIT  INFORMATION — Concluded 

(D)   Credit  Cooperative  Methods 

Credit  interchange  is  the  latest  significant  develop- 
ment of  credit  economy.  Credit  interchange  means  the 
exchange  between  merchants  of  trade  information  and 
ledger  experience.  A  large  proportion  of  all  credit  infor- 
mation is  acquired  from  people  in  business,  but  this  par- 
ticular division  embraces  the  actual  experiences  of  credit- 
ors with  debtors  in  relation  to  the  amount  of  purchases, 
the  character  of  payments,  and  the  creditor's  estimate  of 
the  debtor,  based  upon  actual  credit  transactions.  This 
information  represents  the  creditor's  opinion  of  the  trader 
based  upon  the  character  of  his  account  and  does  not  re- 
late generally  to  the  questions  of  antecedents,  past  experi- 
ence in  business,  environment,  and  other  matters  of  a  local 
nature,  as  mercantile-agency  information  largely  does. 

The  utilization  of  ledger  experience  has  had  the  effect 
of  creating  a  strong  cooperative  spirit  among  merchants. 
This  has  been  explained  in  the  discussion  of  the  inability 
of  the  mercantile  agencies  to  secure  trade  information 
with  the  same  thoroughness  and  facility  as  cooperative 
agencies.  There  is  no  information  more  eagerly  sought  by 
credit  departments  nor  in  which  credit  men  take  a  more 

203 


204  CREDIT  AND   ITS   USES 

intense  interest  than  ledger  experience.  As  an  auxiliary 
to  the  branches  of  information  already  discussed,  there 
must  be  such  thorough  corroboration  as  will  satisfy  the 
credit  man  that  he  has  exhausted  every  available  means 
for  the  procurement  of  facts  affecting  an  application  for 
credit. 

While  the  great  benefits  of  this  system  are  freely  con- 
ceded, many  refrain  from  doing  their  part  toward  perfect- 
ing it,  although  no  one  questions  that  the  best  interests  of 
all  would  be  served  by  cordial  cooperation.  Through  it 
the  weeding  out  of  undesirable  customers  in  banking  and 
commercial  circles  would  be  effected.  The  dishonest  man 
is  often  detected  in  the  perpetration  of  his  schemes  by 
conference  among  those  with  whom  he  is  doing  business. 
In  banking,  the  ability  of  men  to  borrow  beyond  their 
proper  limits  would  be  negatived  by  the  operations  of  a 
frequent  interchange  among  banks  and  others  of  the  facts 
respecting  the  condition  of  accounts.  The  tendency  on  the 
part  of  people  who  have  objects  to  achieve,  to  organize  in 
associations  or  other  forms  of  assemblies  and  unions,  has 
brought  forcibly  to  light  the  dependence  which  each  must 
place  upon  the  other,  and  the  splendid  results  of  such  de- 
pendence. It  has  had  another  and  equally  felicitous  effect, 
and  that  is  to  make  men  in  business,  no  matter  in  what 
trade  or  calling  they  may  be  engaged,  entertain  closer  and 
friendlier  relations  with  each  other,  thus  inducing  expres- 
sions of  that  complete  confidence  essential  to  thoroughly 
developed  and  elevated  business  standards  and  morals. 

The  difficulty  of  determining  accurately  the  reliance 
to  be  placed  upon  general-credit  information  has  called 
credit   interchange  into  being.      It  is   a  credit-clearance 


SOURCES  OF  CREDIT  INFORMATION  205 

system.  Its  aim  is  to  locate  the  firms  with  which  a  cus- 
tomer is  dealing;  and  having  found  them,  to  institute 
an  investigation  as  to  the  standing  wpon  their  hooJcs  of  the 
applicant  for  credit.  Such  an  investigation  can  be  very  ex- 
tensive, thereby  affording  a  mass  of  reliable  information. 
It  is  the  opinion  of  those  engaged  in  credit  work  that  there 
should  be  some  substantial  accessory  to  the  mercantile- 
agency  information.  There  is  no  better  field  for  the  estab- 
lishment of  such  an  accessory  than  among  mercantile 
houses  and  banks.  The  latter  are  in  a  position  to  provide 
information  of  a  vital  character  in  regard  to  the  standing 
of  people  with  whom  they  deal.  They  can  tell  whether  a 
man  is  prompt  or  slow  in  his  payments,  whether  he  shows 
a  disposition  to  overbuy  or  to  be  prudent,  whether  his  gen- 
eral methods  indicate  that  he  has  a  fair  understanding  of 
good  business  methods;  or,  on  the  other  hand,  whether  he 
shows  a  tendency  to  sharp  practice  and  is  an  unsatisfactory 
and  troublesome  customer.  There  is  more  information  of 
this  character  exchanged  to-day  than  ever  before,  but  the 
volume  is  still  relatively  limited. 

There  is  another  strong  reason  why  the  interchange  of 
credit  information  on  the  cooperative  basis  is  necessary. 
The  favorite  method  adopted  by  those  who  desire  to  de- 
fraud their  creditors  is  to  purchase  large  stocks  prepara- 
tory to  failing.  There  are  other  cases  in  which  men  are 
tempted,  through  ambition  or  a  desire  to  recoup  themselves 
from  the  losses  of  a  poor  season's  business,  to  purchase  be- 
yond the  amount  that  their  responsibility  would  justify. 

Overbuying,  no  matter  what  the  reason  behind  it  may 
be,  is  a  great  business  evil.  In  order  to  avert  the  ad- 
verse results  of  overbuying  there  should  be  thorough 
conference  regarding  accounts  owing  or  orders  awaiting 


206  CREDIT  AND  ITS  USES 

shipment,  as  this  will  determine  whether  there  has  been 
overbuying  on  the  part  of  a  debtor  or  prospective  customer. 

The  present  cooperative  methods  are  the  outgrowth  of 
a  system  of  credit  interchange  which  has  existed  for  many 
years.  The  expression  of  opinions  between  men  in  regard 
to  the  commercial  standing  of  a  person  constituted  credit 
cooperation.  The  system  of  asking  and  exchanging  ref- 
erences is  an  early  feature  of  credit  cooperation.  Oral  in- 
vestigations by  representatives  of  credit  departments  is 
a  third  feature  of  credit  cooperation,  but  none  of  these 
methods  is  sufficiently  effective  imsupported  by  ample 
credit  interchange.  A  further  development  of  the  credit 
cooperative  theory  was  the  organization  of  trade  agencies 
from  which  there  has  developed  a  demand  that  means 
should  be  adopted  for  bringing  into  closer  communication 
men  engaged  in  different  lines  of  trade  under  the  auspices 
of  trade  bureaus  governed  by  the  merchants  themselves. 

There  are  a  large  number  of  organizations  acting  as 
mediums  for  the  clearance  of  credit  information;  in  fact, 
there  are  too  many  such  organizations.  The  number  con- 
cerned has  naturally  produced  a  great  variety  of  systems. 
This  lack  of  uniformity  is  the  inevitable  result  of  the  fact 
that  the  system  has  had  to  depend  for  its  development 
Upon  the  sporadic  attempts  of  its  followers  to  cultivate  its 
popularity  among  credit  men. 

A  consideration  of  the  methods  of  credit  cooperation 
employed  by  the  organizations  interested  in  this  work  in- 
dicates this  lack  of  uniformity,  although  the  basic  idea 
involved  in  all  is  practically  the  same.  The  work  of  these 
credit-interchange  bureaus  seems  to  be  held  in  high  es- 
teem, and  it  would  appear  that  the  most  satisfactory  results 
are  obtained  where  the  work  of  credit  interchange  is  car- 


SOURCES  OF  CREDIT  INFORMATION  207 

ried  on  in  a  certain  trade.  These  organizations  consist  of 
credit-clearance  agencies,  trade  bureaus  organized  by  the 
people  interested  in  the  different  trades,  and  a  number  of 
affiliated  branches  of  the  National  Association  of  Credit 
Men. 

The  methods  employed  in  the  clearance  of  credit  infor- 
mation are  two :  the  first,  a  method  by  which  ledger  facts 
and  other  information  are  obtained  through  the  represent- 
atives of  credit  departments ;  and  the  second,  a  method  of 
entering  information  upon  forms  provided  for  that  pur- 
pose, these  forms  being  afterwards  assembled  and  a  com- 
pilation made  of  all  the  information  acquired. 

(1)  The  details  of  the  first  method  are  substantially  as 
follows,  this  being  the  policy  of  certain  credit  associations : 
An  office  is  established  in  charge  of  a  secretary  or  clerk. 
The  names  of  the  business  concerns  desiring  to  participate 
are  listed  and  a  number  assigned  to  each  concern.  Printed 
copies  of  this  list  are  distributed  so  that  each  member  will 
know  his  own  number  and  also  be  able  to  identify  any 
other  concern  by  its  number  whenever  the  latter  shall 
appear  upon  communications  sent  to  him.  The  members 
are  supposed  to  submit  to  the  office  a  list  of  all  their  cus- 
tomers. A  card  is  made  out  bearing  the  name  of  each 
customer;  upon  this  card  is  also  entered  the  numbers 
representing  the  concerns  who  are  selling  to  this  particular 
customer.     As  an  example : 

No.  1  is  John  Brown  &  Co. 
No.  2  is  Frank  Smith  &  Co. 
No.  3  is  Richard  Fox  &  Co. 

They  may  all  be  selling  Albert  Stead  &  Co. ;  conse- 
quently, on  Albert  Stead  &  Co.'s  card  will  be  entered  the 


208  CREDIT  AND  ITS  USES 

numbers  1,  2,  3.  This  indicates  that  John  Brown  &  Co., 
Frank  Smith  &  Co.,  and  Richard  Fox  &  Co.  are  all  in- 
terested in,  or  selling,  Albert  Stead  &  Co.  It  will  be  as- 
sumed that  Frank  Smith  &  Co.  has  received  an  order  for 
$500  worth  of  goods  from  Albert  Stead  &  Co.  and  the 
latter  is  already  owing  the  firm  $1,000.  The  credit  man 
of  Frank  Smith  &  Co.  decides  to  investigate  the  general 
indebtedness  of  Albert  Stead  &  Co.  before  shipping  the 
goods.  He  therefore  sends  to  the  oflBce  of  the  credit  bureau 
an  inquiry  ticket  (Form  23)  upon  which  he  enters  the 
name  of  Albert  Stead  &  Co. 

Wlien  this  inquiry  ticket  is  received  at  the  office  of 
the  credit  bureau  the  secretary  or  clerk  refers  to  Albert 
Stead  &  Co.'s  card  and  finds  that  Nos.  1,  2,  and  3  are 
all  interested.  He  therefore  notifies  Messrs.  Frank  Smith 
&  Co.  that  Nos.  1  and  3  are  interested.  The  credit  de- 
partment of  Frank  Smith  &  Co.  has  its  representative 
call  upon  the  firms  designated  as  Nos.  1  and  3  to  learn 
from  them  the  state  of  their  accounts  with  Albert  Stead 
&  Co.  The  investigations,  therefore,  whether  conducted 
through  representatives  of  the  credit  department  or  by 
telephone,  are  oral  investigations.  Investigations  under 
this  system  are  rarely  made  by  correspondence  unless 
members  of  the  bureau  are  located  in  different  cities. 

It  may  be  contended  that  this  system  has  an  advantage 
over  others  in  that,  when  making  investigations,  many 
questions  could  be  asked  other  than  the  amount  owing,  the 
method  of  payment,  and  the  general  opinion  of  the  ac- 
count. At  the  same  time  it  should  not  be  overlooked  that 
if  the  interview  be  a  general  one  there  may  be  an  absence 
of  that  entire  candor  that  is  essential  to  correct  credit 
interchange. 


INQUIRY  TICKET 

Memphis  Credit  Men's  Association 


II  North  Main  Street 


INFORMATION  BUREAU 

Please  furnish  us  with  local  references  on  name  below 

Name 

P.O. 

Date 190 No. 


Form  23. — ^Type  of  inquiry  ticket  used  in  credit  coopebativb- 
burkau  wore. 


210  CREDIT  AND  ITS  USES 

(2)  The  second  method  of  credit  interchange  requires 
that  the  information  furnished  to  the  bureau  must  be  sub- 
mitted in  writing.  This  very  fact  is  a  measure  of  protec- 
tion to  those  availing  themselves  of  the  information  and 
emphasizes  its  reliability.  The  system  is  as  follows:  An 
office  is  established  with  a  secretary  or  clerk  in  charge. 
The  names  of  those  who  are  members  of  the  bureau  are 
listed  and  numl^ered  in  very  much  the  same  manner  as  in 
the  other  method  described.  When  a  house  desires  to  make 
an  inquiry,  it  uses  a  form  prepared  for  that  purpose.  A 
card  index  is  used  containing  the  names  of  those  who  have 
been  inquired  for  from  time  to  time,  and  on  each  card  is 
entered  the  numbers  of  the  houses  who  have  made  inquiries. 
In  this  way,  providing  that  in  the  course  of  a  few  years 
every  member  of  the  bureau  made  inquiries  on  all  his  cus- 
tomers, there  would  be  gathered  by  natural  process  ex- 
actly the  same  list  of  customers  and  houses  interested  as 
called  for  in  method  No.  1.  It  is  not  probable,  however, 
that  every  house  would,  even  within  the  time  mentioned, 
make  inquiries  regarding  every  concern  upon  its  books,  as 
there  are  some  men  who  preserve  so  unquestioned  a  stand- 
ing that  inquiries  upon  them  are  of  infrequent  occurrence. 

Every  morning  the  inquiry  slips  are  assembled  and 
the  names  of  all  the  persons  inquired  for  are  entered  upon 
report  sheets;  a  sheet  is  made  out  for  each  member  and 
delivered  to  him  by  a  messenger.  During  the  course  of 
the  day  the  member  is  supposed  to  enter  opposite  the  names 
appearing  upon  the  sheet  statements  of  his  experiences. 
A  typical  form  used  by  reporting  bureaus  in  this  work  is 
shown  in  Form  24.  The  information  asked  is  the  amount 
owing,  the  amount  overdue,  the  manner  of  payment,  also 
remarks,  if  the  houses  reporting  consider  it  is  necessary  to 


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THE  DENVER  CREDIT  MEN'S  ASSOCIATION. 

REPORTINQ   BUREAU. 


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'Phone  2SM.     ^'?j7„"^|g^^''*' 


Oct.    ICth    1905. 


NAME                    ADDRESS 

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r.tr. 

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REMARKS 

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miltey  4  Look          Boulder 

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a 

lot 

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{1 

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JlSOO 

Chat.  Mtges.-  Robt.  A.  Newman  to  J.  A 
IBOO  Curtis,  1500 

A.  4  L.  Wllzlr.skl  to  I.  J.  Oreen,  fixt 

Stea 
.  Hyn 
i,  15 

ilo 
Ima 
6 

1,  fl 

Larlm 

127  Curtis 

S 

■  Experience  Fhr: 


■  Credit  Co-operative  Bdheao. 


c 


SOURCES  OF  CREDIT  INFORMATION  211 

make  any.  The  maimer  of  payment  is  to  be  indicated  by 
the  symbols  of  a  key,  which  appears  at  the  upper  right- 
hand  corner  of  Form  24. 

A  question  which  might  arise  in  regard  to  this  form 
is  whether  the  key  representing  the  manner  of  payment  is 
sufficiently  explanatory  without  the  addition  of  remarks. 
A  key  should  be  employed  the  symbols  of  which  indicate 
the  manner  of  payment  and  also  embrace  general  opinions, 
"^vhich  otherwise  would  have  to  be  written  at  an  expense 
of  time  and  labor. 

The  "  system  of  remarks  "  (Form  25)  used  by  the 
Merchants'  Credit  Association,  of  San  Francisco,  repre- 
sents a  more  amplified  key.  A  messenger  calls  for  the 
sheets  late  in  the  day,  conveys  them  to  the  office  of  the 
credit  bureau,  and  the  information  appearing  upon  them  is 
compiled  in  the  form  of  separate  reports  upon  each  person 
regarding  whom  an  inquiry  has  been  made.  These  com- 
pilations are  then  distributed  to  the  inquiring  houses  and 
all  other  houses  that  have  given  any  information.  In  this 
way  reciprocity  is  practiced.  It  is  also  customary  with 
some  credit  bureaus  to  send  these  compilations  to  every 
member  on  its  rolls,  irrespective  of  whether  he  has  or  has 
not  made  inquiries  or  given  any  information  in  regard 
to  an  inquiry. 

Some  houses  object  to  belonging  to  credit  bureaus  on 
the  ground  that  membership  renders  it  obligatory  for  them 
to  give  information  in  answer  to  every  inquiry.  There  are 
times  when  the  relations  of  a  firm  with  a  customer  are  of 
such  a  character  that  to  give  the  information  affecting  the 
account,  exactly  as  it  should  be  expressed  (under  the  co- 
operative system)  would  reveal  the  existence  of  a  very 
large  indebtedness,  with  the  result  that  the   customer's 


212  CREDIT  AND  ITS  USES 

credit  would  be  curtailed  in  other  quarters,  and  the  firm 
carrying  the  indebtedness  deprived  of  its  opportunities  of 
collecting  the  account.  The  bane  of  "  carried  "  or  "  car- 
rying "  customers  has  stood  in  the  way  of  a  more  perfect 
development  of  the  credit-interchange  theory.  Some  prog- 
ress has  been  made  toward  removing  the  objection  of 
manufacturers,  wholesalers,  and  jobbers  to  assisting  in  the 
work  of  the  credit  bureaus.  In  the  key  shown  in  Form  24 
the  letter  "  X  "  indicates  "  see  us  personally."  This  is  a 
sign  that  the  information  the  member  has  to  impart  is  of 
such  a  character  that  he  deems  it  inadvisable  to  place  it 
upon  the  report  sheet.  The  unwillingness  of  houses  to 
freely  give  information  in  regard  to  accounts  they  are 
"  carrying  "  has  been  overcome  (through  the  work  of  the 
credit  bureaus)  by  permitting  them  to  convey  the  infor- 
mation in  regard  to  such  accounts  to  the  person  in  charge 
of  the  bureau  to  be  transmitted  by  him  in  a  confidential 
manner  (not  on  a  general  form)  to  the  house  that  has  made 
the  inquiry. 

Tlie  systems  explained  are  those  conducted  upon  a 
strictly  cooperative  basis,  although  they  do  not  comprise 
by  any  means  all  the  efforts  directed  to  the  prosecution  of 
the  credit-interchange  theory.  There  are  concerns  whose 
special  business  it  is  to  acquire  trade  information  and 
disseminate  it  among  their  subscribers.  Their  work  has 
been  of  material  help  in  spreading  the  credit-interchange 
doctrine,  and  the  services  rendered  by  them  have  given 
satisfaction  to  many  credit  men.  A  barrier  in  the  way  of 
the  pronounced  success  of  an  independent  company  doing 
a  business  in  trade  information  is  its  inability  to  induce 
the  acceptance  of  its  service  by  a  sufficiently  large  number 
of  business  houses  to  make  the  interchange  as  general  as 


< 

a 
c 


b 
> 


i2 

Z 

< 

c 
o 
u 

u 


SYSTEA4    OR    REMARKS. 


ASSOCIATION 


S.— Slow 

VS.— Very  Slow.. 
C— Good 


CO.— Cash  Only ; Means— Will 


it  will  lie  interpreted  as  "Cash  Only," 

"        Pays  when  due. 

••        Prompt  usually  but  sometimes  takes  over  tin 

e. 

"         Neither  prompt  nor  slow— Varying. 

"        Generally  behind  time  in  payments. 

"        Always  behind  time  and  amounts  due  accum 

ulate. 

"        Satisfactory— (Do  not  use  if  possible,  is  too 

udegnit< 

Does  not  imply  financial  worth.) 

"        Account  just  opened. 

COD.— Cash  on  Delivery... 

SS.— Becoming  Slower  ,    . 
SF.— Slow  but  Improving. 


B/D— One  Bill  Due  .. 
BID.— Bill  in  Dispute.. 


(Note — Care  should  be  takea 
discounts  in  this  meaning.") 

Our  terms  of  sale  to 

Indicating  slower  tendency  in  payments. 

Indicating  improvement  in  manner  of  payments. 

Must  pay  one  bill  before  another  is  shipped. 

In  explanation  of  overdue  amount  on  Inquiry  Sheet  to 

distinguish  from  account  overdue. 
(Do  not  use  stronger   terms  for  misunderstanding  or 

disputes,  for  it  misleads  ) 
Note  held  forf 


Cflg,— Chattel   Hortgage 

RHg.— Real  Estate  nortgage... 
CS.— Hold  Collateral  Security., 
BT.— Board  of   Trade 


Arrangement 


(Tor. 


jlndt 


ubersof  the  Board  of  Trade  to  refer  t 


Unusual,  conditions,  such  as  consign: 
to  large  indebtedness.    (Subject  ti 


—Special  Information. . 


(Pa. 


if  desired.) 


aents,  explaining 
'  overdue  amount 
furtherexplana- 


it  office.) 


ADVERSE    REHARKS. 


^ady  f- 


TS.— Too  Slow \ 

Und.—Undesirable  ' 

Uns.— Unsatisfactory  ( ' 

RC— Refused  Credit  1 

RfC— Refused  further  credit 
DC— Difficult  to  collect 

S/D—B/L.— Sight  Draft  with  Bill  of  Lading 
HC— In  hands  ol   Attorney  or  Collector 
CDr.— Compelled  to  collect  by  Draft 
CAT.— Collected  b>   Attorney 
UC— Unable  to  c  jlkct 

ExP Execution  Proof 

P&L.— Old   Account  charged   to  Profit   and 

NQ.— No  Good  ... 


s  of  collection  by  force. 


Implying  past  experience. 

Reported  on  Black  List. 

Resorts  to  (luestionable  methods  t 


'  Credit  Association. 


c 


SOURCES  OF  CREDIT  INFORMATION  213 

it  should  be.  If  the  clients  of  a  credit-clearance  concern 
are  few,  it  follows  that  the  trade  experiences  it  acquires  are 
too  meager  to  possess  any  great  value.  The  success  of  the 
credit-interchange  idea  depends  ultimately  upon  the  in- 
formation secured  and  distributed  being  representative  of 
an  entire  trade,  or,  in  any  event,  of  the  most  important 
houses  in  that  trade.  Only  in  this  way  will  there  be  dis- 
covered the  firms  with  whom  the  largest  number  of  people 
are  dealing  and  the  character  of  their  accounts. 

The  most  successful  work  in  the  field  of  credit  co- 
operative methods  as  they  relate  to  trade  information  has 
been  done  by  organizations  instituted  not  for  the  purpose 
of  money  making,  but  rather  to  foster  credit  interchange. 
These  associations  are  composed  of  business  men  who  enter 
into  agreements  with  each  other  to  live  up  to  the  coopera- 
tive ideas  upon  which  the  organizations  are  based.  The 
expense  of  conducting  these  bureaus  is  small,  especially 
when  compared  with  the  fees  charged  by  independent  con- 
cerns. Men  cannot  be  induced  with  any  great  degree  of 
success  to  bind  themselves  by  the  rules  of  independent 
companies,  especially  when  these  rules  provide  for  their 
giving  private  information  into  the  hands  of  those  who  will 
market  it  for  money-making  purposes.  The  number  of 
the  subscribers  of  the  largest  independent  credit-clearance 
bureau,  compared  with  the  number  of  those  who  would  be 
expected  to  cooperate  in  such  a  scheme,  proves  the  verity 
of  the  foregoing  statement.  It  may  be  asked  why,  in  the 
face  of  this  opinion,  so  much  stress  has  been  laid  upon  the 
desirability  of  the  old-line  mercantile  agencies  establishing 
credit  cooperative  bureaus?  In  addition  to  the  reasons 
already  advanced  it  may  be  said  that  the  agencies  have 
become  so  intimately  associated  with  business  life  that  an 
15 


214  CREDIT  AND  ITS  USES 

effort  on  their  part  to  introduce  the  credit-intercliange  idea 
would  not  be  regarded  in  the  same  speculative  manner  as 
the  efforts  of  concerns  which  have  not  succeeded  in  making 
themselves  a  part  of  our  business  economy. 

When  business  men  organize  their  own  credit  bureaus 
there  is  no  necessity  for  anything  more  than  nominal,  and 
in  most  cases  no,  capitalization.  The  service  being  volun- 
tary does  not  require  the  supervision  of  more  than  one  or 
two  competent  men  to  perform  such  executive  duties  as 
may  fall  to  them.  The  question  of  expense  is  therefore  a 
very  important  one  and  has  a  vital  bearing  upon  the  prog- 
ress of  the  credit-interchange  principle,  for  the  simple 
reason  that  if  the  introduction  of  this  principle  of  secur- 
ing credit  information  is  to  be  attended  with  a  minimum 
cost,  the  willingness  of  commercial  concerns  and  bankers 
to  avail  themselves  of  the  service  will  be  more  pronounced 
than  if  the  expense  entailed  be  an  onerous  one.  While 
the  word  "  onerous  "  would  not  apply  to  bankers  or  the 
larger  commercial  institutions,  it  has  a  very  decided  bear- 
ing upon  the  ability  of  a  large  number  of  business  houses 
to  use  this  service,  and  the  success  of  the  system  depends 
not  upon  the  good  will  of  the  larger  commercial  institu- 
tions or  bankers,  but  upon  the  universality  of  the  support 
that  is  extended  to  it. 

The  credit-interchange  system  is  in  its  infancy,  and  the 
extent  to  which  it  will  grow  in  usefulness  is  dependent  en- 
tirely upon  the  faith  that  is  reposed  in  the  system  by  busi- 
ness men.  The  trade  bureaus  already  organized  and  in 
many  cases  rendering  service  of  an  eminently  satisfactory 
character,  and  the  many  credit  bureaus  being  formed  by 
branches  of  the  National  Association  of  Credit  Men,  form 
the  nucleus  of  a  national  credit-interchange  bureau  the 


SOURCES  OF  CREDIT  INFORMATION  215 

institution  of  which  the  requirements  of  credit  reporting 
demand.  This  national  bureau  must  be  the  outcome  of 
efficient  groundwork  on  the  part  of  trade  and  local  report- 
ing bureaus.  To  accomplish  this  it  is  necessary  that  credit- 
reporting  bureaus  be  established  throughout  the  country, 
so  that  when  a  national  organization  is  affected  its  facili- 
ties will  be  so  thorough  and  its  service  so  complete  that 
the  permanency  of  the  system  will  not  be  a  debatable 
question. 


PART  FOUR 
CREDIT-OFFICE  ADMINISTRATION 


CHAPTER   XIII 


THE    ANALYSIS    OF    CREDITS 


(A)    The  Elements  of  Credit.      (B)    Quick  and  Fixed 

Assets 

THE  ELEMENTS  OF  CREDIT 

In  his  "  Introduction  to  the  Study  of  Economies/'  Pro- 
fessor Bullock  expresses  this  opinion :  "  It  can  be  truthfully 
said  .  .  .  that  the  basis  of  modern  business  is  confidence." 
It  is  interesting  to  determine  on  what  this  confidence  is 
based.  Unless  it  is  founded  upon  substantial  elements  it 
is  misplaced,  and  the  exercise  of  misplaced  confidence  leads 
to  unfortunate  results.  Confidence,  in  being  the  basis  of 
modern  business,  also  becomes  the  basis  of  credit,  for  mod- 
ern business  could  not  exist  without  credit 

Having  exhausted  every  means  for  acquiring  facts  and 
figures  in  relation  to  the  applicant  for  credit,  the  credit 
man  must  analyze  this  information  in  order  to  intelligently 
determine  whether  he  is  justified  in  showing  his  confidence 
in  the  risk.  This  confidence  is  based  upon  three  different 
elements,  viz.,  the  reliability,  the  capability,  and  the  re- 
sources of  the  man  seeking  credit  or  "  character,"  ''  capac- 
ity," and  "  capital." 

The  task  imposed  upon  the  credit  man  is  to  determine 
in  what  degree  the  three  elements  of  credit  are  represented 

219 


220  CREDIT  AND  ITS  USES 

in  the  information  before  him.  Credit  information,  if  it 
possess  that  thoroughness  which  should  characterize  it, 
divides  itself  into  these  three  elements,  which  comprise 
everything  essential  to  the  make-up  of  a  credit  risk.  A 
man's  moral  principles,  habits,  antecedents,  manners,  and 
the  estimate  in  which  he  is  held  by  his  neighbors,  consti- 
tute his  character;  his  abilities,  the  record  of  his  business 
experience,  and  the  special  aptitude  he  has  shown  to  mas- 
ter business  difficulties,  indicate  his  capacity;  his  material 
means  or  resources  represent  his  capital.  People  often 
say,  "  his  skill  is  his  only  capital."  This  use  of  the  word 
"  capital  "  is  a  perfectly  proper  one,  although  in  the  analy- 
zation  of  credit  information  "  capital "  denotes  the  re- 
sources of  the  business. 

While  there  are  three  elements  of  credit — character, 
capacity,  and  capital — it  does  not  follow  that  every  man 
either  does  or  need  possess  all  three.  When  this  combina- 
tion is  found  in  a  satisfactory  state,  the  burden  of  the 
credit  man  is  lightened  and  there  is  little  hesitation  on  his 
part  in  granting  credit.  The  fact  that  the  whole  combi- 
nation rarely  exists  in  a  satisfactory  state,  makes  the  an- 
alysis of  credit  information  a  serious  task,  and  demands 
the  exercise  of  that  skill  in  gauging  conditions  that  demon- 
strates the  ability  of  the  credit  man. 

The  possession  of  all  the  elements  of  credit  is  not  abso- 
lutely essential  to  the  ability  of  a  person  to  secure  credit. 
Some  are  granted  credit  on  the  belief  in  their  good  char- 
acter and  exceptional  capability,  although  they  may  have 
little  or  no  means.    A  writer  has  said  on  this  point : 

"  A  man  with  character  and  ability  and  no  money  is  an  anomaly 
in  the  commercial  world,  hence  hardly  worthy  of  our  attention." 


THE  ANALYSIS  OF  CREDITS  221 

The  writer  referred  to  is  not  a  credit  man,  and  this  no 
doubt  accounts  for  the  utterance  of  an  opinion  which  is 
at  variance  with  the  everyday  experience  of  the  credit 
market.  The  fact  is  that  nearly  all  the  great  fortunes  of 
this  country  have  been  builded  by  men  whose  only  assets 
when  they  started  in  life  were  good  character  and  ability: 
the  possession  of  these  elements  enabled  them  to  secure 
credit  favors,  and  thus  accumulate  a  surplus  or  capital 
which  marked  the  foundation  of  fortunes,  the  very  mag- 
nitude of  which  astonishes  the  senses.  The  preaching  of 
the  doctrine  contained  in  this  quotation  would  be  harmful 
in  its  effects  upon  the  young  if  they  were  so  ill  advised 
as  to  digest  any  such  pabulum.  The  acceptance  of  this 
idea  would  mean  that  there  was  no  opportunity  for  anyone 
in  this  day,  unless  he  were  the  possessor  of  sufficient  means, 
to  secure  such  credit  as  he  might  desire.  To  set  up  any 
such  dictum  would  be  to  close  the  doors  of  opportunity 
to  the  poor  and  capable.  No  worse  fate  could  possibly 
overtake  the  commercial  world,  for  it  would  be  left  to 
the  management  of  the  rich  only,  and  deprived  of  the 
influence  which  the  character  and  genius  of  those  without 
means  would  impart  to  it.  The  writer  has  not  depended 
entirely  upon  his  own  views  or  experiences,  but  has  sought 
the  opinions  of  other  credit  men  on  the  question  of  the 
relative  importance  of  character,  capacity,  and  capital  in 
credit  economy;  and  the  burden  of  opinion  strongly  favors 
the  first  two  as  the  most  important  elements  of  credit. 

There  are  occasions  when  a  house,  having  confidence 
in  a  man's  character  and  capacity,  will  give  him  credit  to 
start  a  business  of  his  own — he  has  a  thorough  knowledge 
of  his  surroundings,  the  good  will  of  the  neighborhood, 
industry  and  mercantile  ability,  and  in  a  large  number  of 


222  CREDIT  AND  ITS  USES 

instances  becomes  a  prosperous  merchant;  start  another 
man  alongside  of  him  who  has  plenty  of  capital  and  even 
good  character,  but  little  or  no  capacity  or  ability,  and  the 
chances  are  he  will  be  a  failure. 

In  discussing  the  different  elements  of  credit,  it  should 
be  borne  in  mind  that  a  great  deal  depends  upon  the  char- 
acter of  the  business.  Some  lines  of  trade  are  more 
exacting  than  others,  but  there  is  no  evidence  that  in  any 
the  man  of  good  character  and  ability  is  barred  from  the 
benefits  of  credit. 

Many  believe  that  character  is  the  foremost  element  of 
credit.  This  does  not  imply  that  character  alone  gives  a 
man  a  claim  to  credit,  but  the  wi-iter  does  mean  to  say 
that  unless  a  man  is  of  good  character  he  has  no  right  to 
credit,  no  matter  what  his  capital  or  capacity  may  be. 

In  these  days,  when  property  statements  are  eagerly 
sought,  the  element  of  character  plays  an  intensely  impor- 
tant part  in  the  spirit  behind  the  statement.  The  state- 
ment of  a  man  of  good  character  can  be  depended  upon, 
but  the  statement  of  a  man  of  bad  character  cannot  be 
credited,  even  if  confirmed  by  his  books.  He  will  keep 
dishonest  books,  and  the  latter  have  been  kno"\vn  to  baffle 
"  expert  accountants."  ]\Ir.  William  Post  has  said  in  his 
article  on  "  The  Loan  and  Credit  Department " : 

"Once  you  are  sure  of  both  integrity  and  ability,  you  will  not 
need  to  give  the  same  measure  of  time  to  verifying  or  dissecting 
the  statement." 

and  further: 

"If  you  are  in  a  mist  as  to  integrity,  pass  the  note." 

Capacity,  or  ability,  is  a  quality  which  does  not  neces- 
sarily accompany  either  character  or  capital,  but  one  upon 


THE  ANALYSIS  OF  CREDITS  223 

which  a  business  largely  depends.  Capacity  gives  material 
life  to  an  enterprise.  There  must  be  capacity,  or  there 
will  be  no  energy  or  strength  to  the  organization.  Com- 
plaint is  made  that  too  much  attention  is  paid  to  capital 
and  too  little  to  character  and  capacity.  Perhaps  the  dis- 
position has  been  to  overestimate  the  importance  of  capi- 
tal, which,  we  must  bear  in  mind,  can  only  be  utilized  to 
positive  achievement  w^hen  it  has  capacity  behind  it.  It 
is  true  that  in  thickly  populated  centers  competition  is 
keener  than  formerly,  and  therefore  the  possession  of 
capital  is  more  necessary  in  such  centers  than  was  the  ease 
fifty  or  even  twenty-five  years  ago. 

Capacity  or  personality  as  an  element  of  credit,  occu- 
pies a  place  second  only  to  character.  There  are  credit 
men  who  dissent  from  the  view  that  character  is  an  indis- 
pensable element  of  credit.  It  is  conceded  that  a  man 
who  has  poor  business  capacity  will  not  make  a  success 
of  business,  but  the  combination  of  ''  Al  business  capacity 
and  just  a  little  honesty,"  as  a  Chicago  credit  man  put  it, 
has  its  elements  of  danger.  The  absence  of  honesty  or 
good  character  is  harmful  to  the  interests  of  not  only  the 
wholesaler  or  jobber  who  sells  to  the  retail  merchant,  but 
the  man  with  "  a  little  honesty  "  is  a  menace  to  his  own 
business ;  for  while  he  may  feel  that  he  had  better  treat  his 
creditors  fairly  well,  on  the  principle  that  it  is  the  best 
policy  to  do  so,  he  will  take  advantage  of  those  who  are 
his  patrons;  sharp  practice  toward  them  will  impair  his 
business  through  loss  of  patronage;  and  his  ability  to  pay 
his  accounts  and  be  a  good  steady  customer  of  the  whole- 
saler irreparably  injured.  Mr.  A.  C.  Bartlett,  in  his  lec- 
ture "  At  Wholesale,"  offers  an  excellent  groundwork  for 
a  good  credit,  in  which  the  elements  of  character  and 


224  CREDIT  AND  ITS  USES 

capacity  are  given  what  appear  to  the  writer  to  be  their 
merited  places. 

"  A  successful  merchant  is  one  who  grants  credit  with  a  liberality 
which  insures  the  loyalty  of  his  customers,  and  with  a  conservatism 
which  guards  against  losses.  To  be  a  judge  of  credits  means  to 
be  a  judge,  not  only  of  what  constitutes  a  good  risk  based  upon 
assets  and  liabilities,  but  of  human  nature  as  well.  A  combination 
of  small  capital,  good  character  and  habits  (business  and  otherwise) 
thrift,  and  industry  is  a  much  better  groundwork  for  a  line  of  credit 
to  a  customer  than  is  large  capital,  indifferent  character  and  habits, 
and  loose,  unbusinesslike  methods.  It  goes  without  saying  that 
adequate  capital,  unimpeachable  integrity,  and  strict  business 
methods  constitute  the  ideal  risk." 


Capital  represents  the  money  or  means  employed  in  the 
business.  In  the  case  of  a  man  beginning  business  in  an 
humble  way,  within  the  means  at  his  disposal,  and  reen- 
forced  by  character  and  capacity,  capital  is  not,  and  should 
not  be,  a  determining  factor. 

When,  however,  a  house  which  is  organized  on  a  pre- 
tentious basis,  with  a  large  staff  of  employees  and  a  big 
expense  account,  seeks  extensive  lines  of  credit,  then  it 
is  certain  that  unless  that  concern  has  within  itself  the 
required  capital  or  moans  of  accommodation  adequate 
to  carry  it  successfully  until  such  time  as  it  can  increase 
its  capital,  the  omission  to  give  to  the  capital  element  a 
primal  place  in  the  consideration  of  the  credit  would  prob- 
ably result  in  a  loss  to  the  creditor. 

Some  credit  men  (although  a  minority)  are  of  the  opin- 
ion that  the  leading  elements  of  credit  are  capacity  and 
capital.  In  support  of  this  contention  the  advocates  of  this 
combination  hold  that  the  statistics  of  failures  prove  that 
the  greatest  number  of  failures  come  from  "  lack  of  cap- 


THE  ANALYSIS  OF  CREDITS  225 

ital "  and  the  next  largest  number  arise  from  "  incom- 
petency "  or  "  incapacity."  This  opinion  has  been  ex- 
pressed by  different  credit  men,  and  was  also  set  forth  in 
a  recent  work  on  credit.  The  figures  published  by  The 
Bradstreet  Company  for  1904  show  that  in  the  United 
States  the  percentage  of  failures  due  to  "  lack  of  capital  " 
was  32.2  and  to  "incompetence"  23.1,  making  55.3  of 
the  entire  number  of  failures  attributable  to  these  causes. 
In  Canada,  during  1904,  the  percentage  from  these  two 
causes  amounted  to  76.4.  This  would  seem  to  be  a  strong 
argument  in  favor  of  the  "  capacity  and  capital "  plat- 
form, but  the  evidence  of  the  figures  is  not  conclusive 
without  an  exhibit  of  the  lines  of  business  in  which  these 
failures  due  to  "  lack  of  capital "  and  "  incompetence  " 
arose.  The  tables  of  The  Bradstreet  Company  also  show 
that  the  great  mass  of  all  the  failures  in  the  United  States 
and  Canada  were  among  those  who  had  less  than  $5,000 
liabilities;  also  that  over  ninety  per  cent  of  those  failing 
were  rated  at  $5,000  or  less.  This  indicates  that  the  largest 
percentage  of  failures  takes  place  among  those  who  have 
little  if  any  capital,  or  the  small  dealers. 

That  so  large  a  percentage  of  failures  takes  place 
among  those  of  very  small  means  does  not  indicate  that  it 
is  necessarily  "  lack  of  capital !  "  The  small  trader  is  in  a 
good  many  cases  one  who  is  willing  to  put  a  little  money 
into  a  business  venture,  trusting  that  it  may  be  a  success, 
and  then  when  he  is  not  able  to  acquire  as  good  a  living 
as  he  expects,  abandons  the  business  entirely.  These  small 
people  cannot  be  judged  by  the  same  standards  of  com- 
petency as  the  larger  traders,  and  it  is  rather  difficult  to 
decide  just  how  far  he  is  affected  by  "  lack  of  capital "  or 
"incompetence";  as  already  stated,  the  figures  are  not 


226  CREDIT  AND   ITS   USES 

conclusive  in  establishing  the  soundness  of  the  premises 
as  to  the  place  of  capacity  and  capital  in  credit,  without 
certain  knowledge  as  to  the  lines  of  trade  in  which  the 
failures  under  discussion  occur.  For  instance,  it  is  rather 
difficult  to  decide  where  a  saloon  keeper's  competence  or 
incompetence  begins  or  ends;  his  lack  of  capital  may  be, 
and  in  a  good  many  cases  is,  the  lack  of  willingness  on  the 
part  of  his  brewer  to  run  the  enterprise  any  longer,  for 
the  actual  capital  put  into  such  a  business  by  the  man  who 
runs  it  is  very,  very  small. 

Another  question  which  arises  here :  Although  so 
large  a  percentage  of  the  failures  occurs  in  the  classes 
rated  $5,000  or  less,  it  would  be  interesting  to  know  just 
what  percentage  this  bears  to  the  whole  number  of  people 
who  are  rated  $5,000  or  less;  remember  that  the  total 
number  of  people  in  business  in  1904  in  the  United  States 
and  Canada,  according  to  The  Bradstreet  Company,  was 
1,418,361,  and  the  number  failing  rated  $5,000  or  less, 
10,488.  As  55.3  per  cent  of  all  the  failures  were  due  to 
"  lack  of  capital  "  and  "  incompetence,"  the  number  of 
those  rated  below  $5,000  whose  failure  is  to  be  attributed 
to  these  causes  is  5,799.  The  writer  ventures  the  opinion 
that  this  number  (5,799)  represents  an  infinitesimal  frac- 
tion of  the  whole  number  of  people  in  business  during 
1904  who  were  rated  $5,000  or  less,  and  it  is  a  comparison 
of  this  whole  number  with  the  number  of  those  who  failed 
because  of  these  reasons  (5,799)  which  would  indicate 
how  far  the  principle  of  trusting  in  men  because  of  their 
character  and  capacity  and  with  little  respect  to  their 
capital,  has  proved  a  salutary  one. 

The  ideal  credit  risk,  ideal  in  the  sense  that  all  ordi- 
nary dangers  are  eliminated,  is  that  in  which  the  three 


THE  ANALYSIS  OF  CREDITS  227 

blements  of  credit — character,  capacity,  and  capital — are 
all  represented.  A  good  risk  is  one  in  which  character 
and  capacity  may  alone  be  represented,  for  good  character 
furnishes  a  moral  guarantee  that  the  interests  of  the  cred- 
itor will  be  respected ;  and  the  capacity  or  ability  will  in- 
sure good  management  and  its  result  a  paying  and  suc- 
cessful business.  A  doubtful  risk  is  one  in  which  character 
and  capital  only  are  found,  as  the  absence  of  capacity  nega- 
tives the  probability  of  success.  Another  doubtful  risk 
is  one  in  which  capacity  and  capital  alone  appear,  as  the 
moral  safeguard  is  missing  and  the  creditor  is  left  entirely 
at  the  mercy  of  the  debtor.  In  risks  where  character, 
capacity,  or  capital  figure  singly,  there  is  little  basis  for 
credit;  as  either  one,  unsupported,  offers  no  groundwork 
for  a  sustained  business  career.  This  opinion  may  be  ques- 
tioned in  the  belief  that  if  a  man  starts  a  business  with 
ample  capital,  but  with  neither  good  character  nor  ability, 
he  would  be  able  to  pay  for  his  goods  because  he  would  have 
the  capital  or  funds  with  which  to  do  it.  He  would  for  a 
time,  so  long  as  his  money  held  out.  After  that  he  would 
be  reduced  to  measures  which  would  undoubtedly  prove 
prejudicial  to  those  crediting  him.  Therefore,  wise  credits 
depend  upon  a  proper  recognition  in  their  respective  places 
of  character,  capacity,  and  capital. 

QUICK   AND   FIXED  ASSETS 

In  order  that  credit  be  wisely  dispensed,  it  is  necessary 
that  the  assets  be  accurately  appraised  and  computed,  and 
their  composition  be  clearly  understood  by  the  credit  man. 
It  is  not  sufficient  that  a  man  submit  a  property  statement 
showing  the  possession  of  a  large  amount  of  stock,  and 


228  CREDIT  AND  ITS  USES 

other  assets,  but  that  those  assets  should  be  of  a  nature 
that  will  make  them  a  real  help  to  the  business  and  not  a 
drawback  to  it.  The  effect  of  the  composition  of  a  man's 
assets  upon  his  paying  qualities  is  one  of  the  most  impor- 
tant questions  demanding  the  consideration  of  the  credit 
man.  If  a  man  be  overstocked  he  will  be  slow  in  his  pay- 
ments— a  fact  to  which  the  credit  man  should  give  due 
weight  before  either  opening  an  account  or  continuing 
one  in  which  he  may  be  interested.  Further,  where  traders 
turn  their  capital  which  should  all  be  employed  in  the 
business  into  different  channels,  such  as  outside  invest- 
ments, real  estate,  and  unproductive  accessories  to  their 
regular  business,  such  assets  as  would  be  represented  under 
these  heads  must  be  very  carefully  analyzed  and  their 
actual  value  only  computed  in  estimating  a  man's  credit 
desirability. 

It  is  e\adent  to  all  who  have  taken  a  deep  interest  in 
the  progress  of  credit  economy  that  the  question  of  the 
nature  of  assets  has  not  been  given  due  prominence  in  the 
discussions  of  credit  problems.  Both  creditors  and  debtors 
have  erred  in  this  regard,  neither  having  given  to  the  sub- 
ject that  thoughtful  attention  which  would  probably  have 
saved  many  serious  losses  in  times  past.  The  debtor's  pro- 
pensity is  to  estimate  at  full  value  everything  of  which 
he  is  possessed,  and  creditors  have  been  too  much  inclined 
to  accept  at  their  face  offering  the  items  of  property  state- 
ments. 

The  assets  of  a  business  are  of  two  classes:  Live  or 
Quick  Assets  and  Slow  or  Fixed  Assets.  The  first  class 
consists  of  that  character  of  property  for  which  there  is 
a  steady  demand,  or  for  w^hich  under  all  ordinary  circum- 
stances there  is  a  ready  market;  or  property  which  can 


THE  ANALYSIS  OF  CREDITS  229 

be  converted  into  money  or  utilized  for  credit  purposes 
on  short  notice.  Such  assets  are  represented  by  cash,  mar- 
ketable merchandise,  good  book  accounts,  securities,  and 
any  other  character  of  personal  property  subject  to  expe- 
ditious sale.  Slow  or  fixed  assets  are  those  for  which  there 
is  not  a  ready  sale,  especially  such  property  as  is  not  of 
constant  utilization  in  the  course  of  the  business.  They 
consist  of  furniture  and  store  fixtures,  buildings,  real  es- 
tate, and  machinery,  and  investments  which  are  of  a  devel- 
opmental or  speculative  nature. 

In  analyzing  a  property  statement  the  credit  man  must 
make  a  division  between  quick  and  slow  assets.  A  con- 
servative estimate  should  then  be  placed  ujjon  these  two 
classes  of  property,  in  order  to  determine  approximately 
upon  how  much  active  capital  the  business  can  depend. 

The  question  which  now  presents  itself  is:  To  what 
extent,  if  any,  should  slow  assets  be  considered  in  esti- 
mating a  man's  credit  responsibility?  Are  they  entitled 
to  any  consideration  or  not,  or  are  they  only  to  be  relied 
upon  as  giving  a  modified  measure  of  support  to  the  busi- 
ness? There  does  not  appear  to  be  a  unanimity  of  senti- 
ment on  this  subject  among  credit  men ;  in  fact,  the  same 
differences  of  opinion  have  arisen  that  seem  to  appear  in 
respect  to  almost  every  matter  concerning  the  dispensation 
of  credit.  It  is  necessary,  therefore,  to  understand  how 
this  question  appeals  to  credit  men,  before  entering  upon 
the  expression  of  any  positive  opinions  in  regard  to  it. 

The  views  of  credit  men  on  this  question  may  be  sum- 
marized as  follows: 

1.  Some  believe  that  slow  or  fixed  assets  should  be 
entirely  eliminated  from  all  calculations  in  estimating  a 
man's  credit  worth. 
16 


230  CREDIT  AND  ITS  USES 

2.  Certain  credit  men  bold  that  a  separation  of  all 
assets  should  be  made  into  the  two  classes,  and  the  slow 
or  fixed  assets  scaled  fifty  per  cent  and  then  regarded  as 
a  matter  of  security  only  for  the  other  elements  of  the 
business. 

3.  It  is  also  held  that  slow  or  fixed  assets  must  be  con- 
sidered in  deciding  on  a  man's  responsibility,  as  they  are 
an  undoubted  help  and  sometimes  a  real  salvation  if  a 
business  has  to  be  liquidated. 

4.  If  slow  or  fixed  assets  are  not  of  sufficient  volume 
to  impair  a  man's  ability  to  secure  a  proper  and  easy  revo- 
lution of  his  capital,  they  are  a  positive  help,  especially 
with  liquidation  in  view. 

5.  If  the  slow  assets  represent  only  a  moderate  percent- 
age of  the  entire  capital,  they  are  in  no  sense  a  detriment, 
but  are  an  element  of  strength. 

It  will  be  observed  that  as  to  views  numbered  two, 
three,  four,  and  five,  the  sentiment  differs  in  form  but  not 
in  principle.  The  opinion  numbered  one,  however,  draws 
the  line  of  cleavage  very  sharply  and  does  indicate  a 
decided  difterence  in  principle  from  the  other  opinions 
quoted.  It  is  questionable  whether  the  idea  of  eliminating 
all  fixed  assets  from  the  consideration  of  a  man's  credit 
responsibility  could  be  rigidly  followed  without  making 
a  radical  reduction  in  a  firm's  sales;  and  the  great  merit 
of  credit-giving  is  to  employ  care  and  conservatism,  at 
the  same  time  making  a  constant  and  judicioiis  increase  in 
the  yearly  sales.  The  plan  of  elimination  suggested  could 
be  and  no  doubt  is  employed  by  banks,  or  when  the  con- 
cern applying  for  the  credit  is  a  large  one  and  the  amount 
of  credit  sought  relatively  large.  It  is  probable  that  this 
plan  is  intended  to  apply  to  such  cases.     Used  in  respect, 


THE  ANALYSIS  OP  CREDITS  231 

to  the  smaller  class  of  traders,  it  might  have  a  tendency 
to  unduly  restrict  credit,  and  this  is  something  that  all 
farseeing  credit  men  desire  to  avoid.  It  is  probable  that 
in  ninety  per  cent  of  the  cases  in  which  credit  is  granted, 
credit  men  look  to  slow  or  fixed  assets  as  a  mainstay  of 
the  business,  or,  as  one  credit  man  has  expressed  it : 

"The  fixed  assets  of  a  concern  (such  as  real  estate,  buildings, 
store  property  on  long  lease  at  low  rental  if  of  sufficient  volume  and 
properly  protected  by  insurance)  we  look  upon  very  favorably  or 
as  the  sheet  anchor  of  the  risk,  because  it  is  largely  this  on  the 
final  wind  up  that  prevents  ultimate  loss." 

In  the  event  of  backward  trade  or  a  business  depression, 
a  man  who  has  transferred  his  ready  capital  into  real  estate 
or  outside  ventures  finds  himself  at  a  great  disadvantage. 
In  good  times,  in  certain  localities,  a  piece  of  real  estate 
can  be  disposed  of  as  quickly  almost  as  any  other  character 
of  property,  but  this  is  the  exception  and  not  the  rule, 
unless  sacrificed.  Very  often  a  merchant  will  go  to  a  large 
outlay  improving  his  premises,  putting  in  costly  fixtures, 
and  to  do  so  has  to  use  capital  which  should  not  be  with- 
drawn from  the  business.  In  addition,  improvements  of 
this  nature,  while  they  may  be  helpful  in  some  lines  of 
business  for  advertising  purposes,  shrink  in  value  with 
time  and  are  of  no  assistance  whatever  as  a  means  of 
securing  credit  accommodation,  especially  at  a  time  when 
it  is  most  sorely  needed. 

The  tendency  to  turn  one's  capital  from  live  to  slow 
assets  is  attended  with  more  danger  in  some  lines  of  trade 
than  in  others.  In  a  business  where  goods  must  be  bought 
on  short  time  and  prompt  payments  exacted,  the  mer- 
chant must  have  all  available  capital  constantly  at  his 


232  CREDIT   AND   ITS   USES 

command;  in  such  a  business  an  undue  proportion  of  slow 
to  live  assets  is  an  unerring  warning  to  the  credit  man. 
In  lines  of  trade  where  goods  are  sold  on  long  time, 
the  presence  of  slow  assets  is  not  as  decided  a  disadvan- 
tage, but  one  to  which  proper  significance  should  be  at- 
tached. Credit  men  have  found  from  experience  that 
certain  slow  or  fixed  assets  have  been  the  means  of  avert- 
ing serious  losses  from  bad  debts  when  a  concern  is  in- 
solvent or  forced  for  other  reasons  to  liquidate.  It  would 
have  been  much  better,  however,  if  the  merchant  who  has 
been  unfortunate  had  kept  all  his  capital  in  such  a  form 
that  he  could  have  continually  utilized  it  in  his  business, 
and  in  this  way  no  doubt  avoided  a  failure.  The  loss  to 
business  by  a  man's  failure  is  twofold:  that  which  he 
and  his  creditors  sustain  and  the  loss  which  commerce 
and  trade  suffer  by  the  elimination  of  the  merchant  as 
a  business  factor. 


CHAPTER    XIV 

METHODS    FOB    SAFEGIJARDING    CREDITS 

(A)  General  Expenses  with  Special  Reference  to  Rent. 
(B)  "  Credit  Lines  and  Limitations/'  (C)  Fire  In- 
surance and  Its  Relation  to  Credit.  (D)  Compara- 
tive Statement  Forms 

GENERAL  EXPENSES  WITH   SPECIAL   REFERENCE  TO 

RENT 

Among  the  questions  which  must  be  studied  in  the  con- 
sideration of  a  man's  credit  responsibility  is  his  method 
of  management,  especially  as  it  affects  the  expense  of  con- 
ducting the  business. 

Economy  in  management  is  quite  as  essential  to  the 
success  of  a  business  as  general  efficiency;  in  fact,  economy 
is  a  feature  of  efficient  control.  Extravagance  or  loose 
management  is  destructive  to  the  successful  conduct  of 
a  business.  The  general  expenses  of  a  business  are  usu- 
ally rent,  light,  heat,  clerk  hire,  advertising,  insurance, 
and  many  smaller  items  of  outlay  or  "  sundry  expenses." 
These  are  the  fixed  charges  of  a  business  without  which 
it  cannot  be  prosecuted.  It  is  customary  to  insert  in 
property-statement  forms  the  question :  "  What  are  your 
annual  expenses? "  or  a  better  question  and  one  also 
largely   used,    "  State    amount   of   expenses    last    year." 

233 


234  CREDIT  AND  ITS  USES 

Some  credit  men  consider  that  where  a  large  amount  of 
credit  is  at  stake  they  should  have  an  itemized  list  of 
the  expenses  a  merchant  has  incurred  during  the  pre- 
ceding year.  There  are  excellent  reasons  why  this  should 
be  done,  although  to  exact  such  a  list  in  a  great  many 
cases  might  have  a  tendency  to  irritate  the  man  giving 
the  statement. 

The  danger  of  exciting  the  resentment  of  the  trader 
by  asking  him  to  give  a  statement  of  his  affairs,  and  the 
desire  to  cater  to  his  prejudices,  has  resulted  in  the  use 
of  statement  forms  that  are  altogether  too  brief  to  form 
"  an  adequate  foundation  for  a  liberal  credit,"  and  the 
doubt  created  by  a  general  statement  of  the  gi'oss  amount 
of  annual  expenses  should  be  avoided  by  demanding  an 
itemized  list  of  expenses.  Where  the  amount  of  credit 
sought  is  trifling,  the  necessity  for  such  detail  does  not 
exist;  but  when  the  credit  man  feels  that  the  amount 
involved  justifies  his  insisting  upon  an  itemized  list  of 
yearly  expenses,  he  is  remiss  if  he  does  not  demand  it. 

Although  most  property  statements  do  not  call  for 
an  itemized  list  of  annual  expenses,  some  ask,  "  What 
amount  of  rental  is  paid?" 

Unquestionably,  rent  is  looked  upon  as  a  matter  of 
more  than  ordinary  importance,  otherwise  questions  in 
regard  to  it  would  not  appear  in  property  statements. 
Kotwithstanding  the  prominence  given  to  this  question 
in  statement  forms,  it  is  one  respecting  which  there  has 
been  little  public  discussion  as  related  to  the  problem 
of  credits.  There  is  general  agreement  on  this  point: 
viz.,  that  the  question  of  rental  is  not  affected  or  should 
not  be  affected  by  the  capital  employed  or  the  vol- 
ume of  business  transacted,  but  that  it  is  more  generally 


METHODS  FOR  SAFEGUARDING  CREDITS  235 

based  upon  the  profits  which  may  be  derived  from  the 
business. 

Mr.  Samuel  J.  Kline,  of  Chicago,  shows  that  the  basis 
of  rental  depends  very  largely  upon  the  nature  of  the 
business,  as  follows: 

"  It  will  therefore  be  seen  that  the  signing  of  a  lease  for  a  term 
of  years  is  a  matter  which  should  receive  most  careful  consideration. 
Naturally,  like  any  other  form  of  expense,  the  rental  should  bear 
a  well-defined  relation  to  the  sales,  or,  to  be  more  exact,  to  the 
gross  profits.  We  make  this  distinction  between  sales  and  gross 
profits  because  some  lines  yield  a  very  much  greater  percentage 
of  profit  than  others;  for  instance,  a  drug  store  located  on  some 
prominent  corner  might  with  perfect  safety  pay  a  very  much  larger 
percentage  of  its  sales  as  rental  than  could  be  paid  by  almost  any 
other  branch  of  business,  but  the  relation  of  the  rent  to  the  gross 
profits  should  in  every  line  be  approximately  the  same." 

The  foregoing  expresses  the  general  trend  of  opinion  in 
regard  to  this  subject. 

It  is  obvious  that  one  of  the  most  important  elements 
affecting  the  question  of  rental  is  that  of  location.  Dif- 
ferent lines  of  business  require  different  characters  of 
location;  for  instance,  a  jobbing  or  wholesale  establish- 
ment in  certain  lines  need  not  be  located  on  the  best  busi- 
ness street,  for  the  reason  that  the  rental  in  such  a  location 
would  be  higher  than  the  purposes  of  the  business  neces- 
sitate. A  large  percentage  of  the  business  transacted  by 
wholesale  and  jobbing  concerns  is  done  by  their  traveling 
representatives,  and  patrons  do  not  find  it  absolutely  neces- 
sary to  visit  houses  from  whom  they  make  purchases ; 
neither  is  it  necessary  to  display  goods  as  in  the  retail 
business;  consequently,  the  importance  of  the  location  is 
minimized.    It  is  necessary  that  a  house  in  any  trade  be 


236  CREDIT  AND  ITS  USES 

located  where  it  will  he  convenient  for  its  patrons  and  the 
general  transaction  of  its  business. 

There  is  a  radical  variation  of  opinion  as  to  the  ratio 
which  rental  should  bear  to  the  gross  expenses,  estimates 
running  all  the  way  from  one  per  cent  to  seven  per  cent 
of  the  business  done.  How  far  these  percentages  accu- 
rately reflect  conditions  as  shown  in  property  statements 
it  is  impossible  to  say.  Mr.  F.  H.  McAdow,  of  the  Staver 
Carriage  Co.,  Chicago,  has  made  an  analysis  of  certain 
statements  in  his  credit  flies,  which  he  has  placed  at  the 
disposal  of  the  writer,  and  the  results  of  this  examination 
are  as  follows : 

"Judging  from  the  answers  given  on  the  statements  I  have 
been  looking  over,  a  rental  of  $300  per  annum  seems  to  be  the 
average  for  sales  running  from  $6,000  to  $15,000.  It  is  rather 
surprising  to  note  the  variation.  One  firm  in  a  small  town  pays 
$15  per  month,  or  $180  per  annum,  on  a  business  of  $7,000  annually. 
Another  man  in  a  still  smaller  town  pays  $180  per  annum  and  does 
$13,000  worth  of  business  a  year.  In  another  case  a  dealer  pays 
$1,200  per  annum  rental  and  is  doing  a  business  of  from  $20,000  to 
$25,000  per  annum.  This  man,  however,  is  not  very  successful,  as 
his  indebtedness  indicates,  although  he  has  been  in  business  for  a 
long  time.  As  an  indication  of  what  it  costs  a  firm  when  they  own 
their  own  property,  I  note  in  one  case  where  the  store  building  and 
lot  are  valued  at  $4,500,  while  the  dealer  does  a  business  amounting 
to  $6,000  annually.  He  would  have  to  figure  interest,  indebtedness, 
taxes  and  betterments  on  his  property  at  about  eight  per  cent, 
so  he  is  paying  $360  per  annum,  or  six  per  cent  of  his  gross  sales, 
which  is  considerably  higher  than  the  average.  So  when  we  con- 
sider the  fact  that  in  these  times  dealers  cannot  figure  a  gross  profit 
of  more  than  fifteen  per  cent  or  twenty  per  cent  on  their  gross 
sales,  if  they  are  to  make  a  reasonable  net  profit  on  their  capital 
invested  they  must  keep  their  expenses  down  and  leave  a  safe 
percentage.  A  conservative  percentage  to  allow  for  rent  would 
be  from  three  per  cent  to  five  per  cent  of  the  aimual  business,  or 


METHODS  FOR  SAFEGUARDING  CREDITS  237 

gross  sales.  By  the  time  other  necessary  expenses  are  added  to 
this  as  a  starting  point,  the  profit  will  l)e  small  enough.  From  the 
property  statements  I  have  looked  over  in  our  files,  I  believe  the 
average  would  be  about  four  per  cent." 

One  of  the  interesting  facts  to  be  derived  from  the 
foregoing  is  tliat  two  men  engaged  in  the  same  business 
are  paying  the  same  amount  of  annual  rental,  although 
one  is  doing  twice  as  much  business  as  the  other.  This 
may  be,  however,  no  reflection  upon  the  judgment  of  the 
man  who  is  doing  the  smaller  business,  for  the  town  in 
which  he  lives  may  be  one  in  which  general  real  estate 
valuations  are  much  higher  than  in  the  other,  and  it  may 
be  impossible  for  him  to  secure  any  lower  rental  than  that 
which  he  is  paying.  The  only  conclusion  deducible  from 
this  condition,  however,  is  that  the  man  who  is  doing  the 
larger  business  is  in  the  enjoyment  of  a  great  advantage, 
for  which  local  conditions  are  entirely  responsible. 

Mr.  McAdow  says  the  average  would  be  about  four 
per  cent,  and  the  only  method  of  determining  whether  this 
average  is  a  justifiable  one  would  be  to  submit  the  ques- 
tion to  the  test  proposed  by  Mr.  Charles  Biggs,  of  New 
York,  viz.,  "  to  ascertain  the  usual  rental  for  a  given 
amount  of  space  and  which  is  essential  to  the  successful 
prosecution  of  the  business." 

It  is  e\ident  from  opinions  expressed  that  some  credit 
men  do  not  regard  the  question  of  rental  or  any  other 
item  that  enters  into  the  general  expense  of  a  business  as 
being  of  a  nature  to  warrant  any  special  analysis;  some 
inclining  to  the  idea  that  the  matter  of  rental  is  one  which 
must  of  necessity  be  left  to  the  judgment  of  the  merchant; 
or,  on  the  other  hand,  that  a  man  should  not  hamper  him- 
self by  paying  small  rent  in  an  undesirable  location  if 


238  CREDIT  AND  ITS  USES 

he  considers  that  the  prospects  of  doing  a  successful  busi- 
ness will  be  enhanced  by  remo^Hing  to  a  location  where 
the  rental  may  be  much  higher;  this  being  in  harmony 
with  the  general  consensus  of  opinion  on  this  question. 

Certain  States  have  laws  which  give  a  landlord  a  pref- 
erence covering  the  amount  of  rental  due  him,  or  the 
amount  which  would  become  due  during  the  full  term  of 
a  lease,  and  cases  could  be  cited  where  the  operation  of 
such  laws  have  consumed  the  entire  estate.  Under  the 
National  Bankruptcy  Act,  preferences  of  this  character 
cannot  be  enforced ;  but  if  at  any  time  that  act  should  be 
repealed  and  the  country  return  to  the  State  system,  the 
question  of  rental  would  become  a  more  important  one 
than  it  is  ordinarily  supposed  to  be,  and  more  attention 
would  have  to  be  given  to  it  than  in  the  past. 

The  amount  which  a  man  is  paying  for  rental,  if  it  be 
of  sufEcient  importance  to  be  made  a  matter  of  special 
inquiry  in  a  property-statement  blank,  should  also  be  a 
matter  of  careful  investigation  on  the  part  of  credit  men. 
No  good  purpose  can  be  served  by  asking  the  question, 
unless,  after  it  is  answered,  the  credit  man  satisfies  himself 
that  the  rental  being  paid  is  proper.  The  guide  to  a  cor- 
rect determination  of  this  question,  as  indicated  by  Mr. 
Biggs  and  explained  in  the  other  opinions  cited,  can  be 
used  with  profit  by  credit  men  in  order  that  tendencies 
on  the  part  of  those  applying  for  credit  to  indulge  in  un- 
necessary expenses  may  be  checked. 

"CREDIT   LINES   AND   LIMITATIONS" 

In  the  consideration  of  the  methods  of  banking  credit 
departments,  attention  was  called  to  the  question  of  dis- 
count lines  or  stated  amounts  that  a  bank  would  be  will- 


METHODS  FOR  SAFEGUARDING  CREDITS  239 

ing  to  lend  to  a  customer  from  time  to  time,  and  which  a 
customer  could  relj  upon  receiving  whenever  he  found 
it  necessary  to  ask  accommodation.  It  was  also  shown 
that  there  is  no  definite  rule  for  determining  what  a  cus- 
tomer's credit  limit  shall  be.  In  commercial  credit  there 
is  supposed  to  be  some  definite  "  line  "  or  amount  of  credit 
that  a  house  is  willing  to  accord  to  a  customer.  The 
method  of  deciding  as  to  what  such  lines  shall  be,  or  ad- 
hering to  them,  seems  to  be  a  matter  of  as  much  random 
reasoning  and  practice  as  the  assignment  of  discount  lines 
in  banking.  There  always  has  been  a  sentiment  among 
credit  men  in  favor  of  according  to  each  customer  (and 
marking  on  his  account  in  some  way)  a  certain  figure 
representing  the  limit  of  credit  which  they  believe  should 
be  granted  to  him. 

The  credit  line  or  limit  of  credit  was  probably  insti- 
tuted as  a  danger  signal  for  credit  men,  and  if  this  be  the 
only  purpose  it  has  served,  it  has  fulfilled  its  mission.  The 
difficulty  with  the  idea  is  that  in  selecting  the  lines  or 
limits  there  has  been  no  explicit  rule  followed.  Even  in 
the  same  trade  two  credit  men,  when  according  a  line  to 
the  same  customer,  will  assign  entirely  different  amounts 
to  him.  The  variation  in  these  limits  may  reflect  the  dis- 
parity in  temperament  of  the  respective  credit  men,  but 
if  their  views  be  radically  dissimilar  it  shows  that  there 
is  not  that  general  agreement  as  to  credit  usages  that 
should  exist. 

Consultation  with  credit  men  reveals  this  situation: 
It  is  the  rule  of  certain  concerns  to  fix  limits  on  all  ac- 
counts, but  no  pretense  is  made  to  adhering  to  them. 
Others  consider  that  credit  lines  are  useful  only  in  the 
cases  of  financially  weak  customers,  so  that  if  accounts 


240  CREDIT   AND   ITS   USES 

are  not  paid  promptly,  a  halt  may  be  called  and  further 
credit  denied.  Others  claim  to  use  credit  lines  as  a  pre- 
cautionary measure,  so  that  the  bookkeeper  may  call  at- 
tention to  an  account  when  the  line  of  credit  has  been 
reached.  Still  others  think  that  credit  lines  are  necessary 
in  the  case  of  first  purchases  only,  and  that  any  subsequent 
accounts  should  be  judged  on  their  merits.  In  some  credit 
departments  credit  lines  are  used  only  on  small  accounts. 
It  is  also  found  that  many  credit  men  do  not  use  credit 
lines  at  all,  and  consider  them  of  no  value;  the  belief  of 
this  class  being  that  every  purchase  should  be  considered 
in  order  that  credit  be  safely  extended,  for  only  through 
this  method  will  the  changing  conditions  in  the  circum- 
stances of  debtors  be  given  the  attention  that  each  develop- 
ment deserves,  whether  it  be  for  good  or  ill. 

In  some  trades  credit  men  say  they  find  it  inadvisable 
to  assign  credit  lines,  for  the  reason  that  if  a  man's  respon- 
sibility is  not  such  that  they  can  afford  to  sell  him  all  he 
will  require  during  a  season,  they  can  hardly  afford  to  deal 
with  him  at  all.  In  such  cases  a  man's  limit  of  credit  is 
measured  by  his  requirements,  although  it  is  well  under- 
stood that  such  requirements  will  be  predicated  upon  his 
resources  and  general  credit  standing,  whatever  they  may 
be.  After  all  has  been  said,  the  fact  remains  that  the 
utility  of  credit  lines  is  not  universally  recognized,  and 
there  is  apparently  no  scientific  basis  of  calculation  for  the 
determination  of  such  lines. 

The  most  effective  method  of  reaching  an  understand- 
ing as  to  the  ^"iews  of  those  who  believe  in  and  those  who 
are  opposed  to  the  use  of  limits  of  credit,  would  be  to  take 
the  opinions  of  practical  credit  men  representing  the  affir- 
mative and  negative  of  this  subject.    The  opinions  quoted 


METHODS  FOR  SAFEGUARDING  CREDITS  241 

are  thorough  in  their  analysis  of  the  different  phases  of  this 
question  and  exhibit  ideas  prevailing  in  two  of  the  staple 
lines,  viz.,  the  grocery  and  dry  goods  trades.  The  first 
opinion  is  that  of  a  credit  man  of  one  of  the  largest 
grocery  concerns  in  the  Middle  "West,  and  is  as  follows  : 

"For  convenience  and  office  reference,  a  nominal  line  of  credit 
is  assigned  to  customers  on  credit  index  cards  but  not  closely 
adhered  to.  This  line  of  credit  is  generally  figured  at  about  ten 
or  fifteen  per  cent  of  the  net  trade  assets  of  our  customers  which 
represents  their  reasonable  requirements;  in  other  words,  a  dealer 
in  our  line,  with  a  $2,000  investment  ordinarily  requires  a  S200  to 
$300  line  of  credit.  He  might  have  $10,000  outside  property, 
making  him  safe  for  much  larger  amounts,  but  our  index  record  is 
noted  for  his  reasonable  requirements  only  on  amount  of  stock 
carried  and  business  done.  On  the  other  hand,  a  customer,  iu 
whom  we  have  impHcit  reliance  as  to  honesty,  ability  and  prospects, 
with  a  net  worth  of  $1,000  to  $2,000,  giving  us  his  entire  business, 
will  often  receive  a  line  of  $1,000  to  $2,000  credit,  or  as  much  as  he 
is  actually  worth  and  this  may  not  represent  more  than  thirty 
days'  purchases,  as  an  active  retail  grocer  will  often  tiu-n  his  stock 
in  from  three  to  five  weeks  and  in  selhng  for  cash,  or  with  careful 
credit  in  connection  with  other  favorable  conditions,  will  be  reason- 
ably safe  for  liberal  Unes.  I  always  avoid  giving  a  customer  or  sales- 
man to  understand  that  a  certain  line  of  credit  will  be  extended  as 
with  changing  conditions,  a  line  that  is  safe  to-day  in  a  few  months 
may  be  dangerous,  and,  therefore,  being  handicapped  by  promises 
salesmen  frequently  make  to  customers,  that  the  house  will  carry 
them  for  such  and  such  amounts.  Customers  will  often  abuse  such 
privileges  and  understanding  that  we  will  grant  them  certain  lines, 
will  lean  more  heavily  upon  our  good  will  than  they  should  or  relax 
necessary  care  in  their  credits  and  collections.  Again,  a  customer 
from  all  mformation  may  be  entitled  to  a  $1,000  line  of  credit  and 
owing  only  $200  or  $300,  but  this  several  weeks  or  months  overdue. 
Notwithstanding  the  supposed  safety  of  the  risk,  I  would  not  in- 
crease the  account  until  delinquent  matters  had  been  adjusted  or 
satisfactorily  explained.    You  will,  therefore,  notice  that  the  line 


242  CREDIT  AND   ITS   USES 

of  credit  I  assign  is  by  no  means  absolute  nor  closely  adhered  to, 
but  simply  used  as  a  convenient  reference  for  assistants  or  other 
employees  to  whom,  in  emergencies,  it  may  be  necessary  to  refer 
orders.  I  understand  some  jobbers  enter  a  line  of  credit  on  the 
ledger  page  of  each  customer  which  is  adhered  to  closely  and  book- 
keepers allowed  to  pass  orders  as  long  as  the  account  does  not 
exceed  the  stated  line,  or  is  badly  in  arrears.  In  that  way  a  small 
percentage  only  of  orders  is  actually  passed  upon  by  the  Credit 
Manager  or  his  Assistants,  but  handled  by  bookkeepers.  I  do  not 
believe  such  practice  is  general,  though  some  prominent  houses 
adopt  it,  but  I  am  confident  no  credit  man  can  successfully  keep  in 
touch  with  his  accounts  without,  in  a  general  way,  watching  the 
individual  orders  and  remittances  from  customers  as  well,  in  con- 
nection with  examining  daily  or  weekly  statements  of  maturing 
bills,  or  semimonthly  or  monthly  delinquent  statements.  In  our 
office  the  credits  are  classified  to  a  large  extent  by  territories,  four 
or  five  of  my  assistants  handling  the  details  and  passing  on  a  large 
percentage  of  orders,  referring  to  me  only  those  that  are  doubtful, 
but,  by  a  system  of  cards,  drawTi  once,  twice  or  three  times  a  month 
from  accounts  that  are  watched  closely,  and  also  a  cursory  glance  of 
statements  mailed  and  remittances  received,  I  can,  as  a  rule,  easily 
keep  informed  of  the  condition  of  dangerous  accounts  which,  as 
you  understand,  are  the  ones  that  require  attention,  the  safe 
credits  generally  taking  care  of  themselves.  Our  bookkeepers  also 
become  familiar  with  requirements  and  call  my  special  attention 
to  accounts  that  are  dragging  imreasonably." 

The  foregoing  opinion,  while  mainly  favorable  to  the 
use  of  credit  lines,  also  shows  the  difficulties  encountered 
in  depending  on  them;  in  fact,  while  it  upholds  this 
method  in  credit  work,  its  opening  statement  is  an  admis- 
sion that  the  lines  are  not  respected.  The  basis  for  the 
establishment  of  these  lines,  viz.,  ten  to  fifteen  per  cent 
of  the  quick  assets  of  a  business,  is  a  conservative  one. 
At  the  same  time,  it  will  be  noticed  how  radically  the 
yiews  of  the  credit  man  change  when  he  has  an  oppor- 


METHODS   FOR  SAFEGUARDING  CREDITS  243 

tunitj  to  secure  what  lie  considers  the  entire  trade  of  the 
purchaser.  This  disposition  to  extend  so  large  a  line  of 
credit  is  justified  by  the  fact  that  the  goods  are  sold  on 
short  terms  and  purchases  are  frequently  made,  both  of 
which  conditions  enable  a  house  to  maintain  closer  and 
better  relations  with  a  customer  than  when  goods  are 
sold  on  long  time  and  purchases  are  made  only  occa- 
sionally. 

Even  where  lines  of  credit  are  supposed  to  be  a  guiding 
rule  of  the  credit  department,  the  point  is  excellently 
taken  by  the  credit  man  quoted,  that  he  is  not  in  the 
habit  of  giving  the  customer  to  understand  that  a  definite 
amount  of  credit  will  be  allowed,  for  everyone  who  has 
had  experience  with  people  who  buy  on  credit  can  appre- 
ciate the  argument  made  by  him.  The  propensity  of 
credit  seekers  is  usually  to  take  advantage  of  almost  every 
condition  that  suggests  itself,  if  encouraged  or  permitted 
by  the  creditor  to  do  so.  The  wisdom  of  using  a  credit 
line  is  approved  by  the  policy  of  the  credit  man  whose  work 
is  under  discussion,  when  he  says  that  where  an  account 
is  overdue  he  would  not  consent  to  increasing  it  in  any 
way  until  the  tardiness  has  been  overcome. 

The  danger  is  also  suggested  of  according  to  book- 
keepers and  subordinates  in  the  credit  office  the  privilege 
of  passing  on  accounts  with  lines  of  credit  as  their  guides. 
A  custom  of  this  character  is  apt  to  divorce  the  credit 
man's  close  attention  and  interest  from  a  large  proportion 
of  the  accounts,  and  this  will  surely  be  attended  by  a  slack- 
ening of  that  studious  application  to  the  duties  of  his  posi- 
tion that  is  essential  to  wise  credit  giving.  There  should 
be  no  disposition  to  alienate  the  bookkeeper's  interest 
from  credit  matters,  for  he  can  be  of  great  help  to  the 


244  CREDIT   AND  ITS  USES 

credit  man;  but  to  assign  to  bookkeepers  the  duty  of 
checking  a  large  number  of  orders  that  must  be  passed 
upon  in  a  business  is  really  creating  a  division  not  only 
of  the  labor,  but  also  of  the  responsibility  that  attaches 
to  the  credit  office.  The  inevitable  result  is  that  "  an 
interest  divided  is  an  interest  lessened,"  so  far  as  the 
efficiency  of  the  credit  department  itself  is  concerned. 

The  other  opinion  to  which  reference  has  been  made, 
and  which  will  now  be  quoted,  comes  from  a  representa- 
tive dry  goods  house  of  the  Middle  West: 

"  I  have  been  trying  for  over  twenty  years  to  learn  how  to  assign 
a  line  of  credit  to  an  account  and  adhere  to  it,  but  have  been  unable 
to  do  so  for  the  reason  that  the  conditions  surrounding  each  account 
are  continually  changing.  For  instance,  a  man  might  come  in  our 
office  to-day  and  make  a  statement  of  his  financial  condition  which 
we  would  find  to  be  correct.  We  would  convince  ourselves  he  was 
honest  and  a  man  of  ability  and  that  he  would  be  careful  in  the 
conduct  of  his  business.  He  might  start  out  with  the  idea  of  doing 
a  cash  business,  as  the  location  was  in  a  prosperous  country.  In  six 
months  he  might  with  good  reason  decide  to  do  a  credit  business. 
Crop  conditions  which  were  perfect  at  the  time  the  business  was 
started  change  to  the  contrary,  as  is  often  the  case  in  the  territory 
in  which  we  do  a  large  portion  of  our  business.  The  number  of 
stores  in  the  town  in  which  he  started  may  have  been  just  sufficient 
or  not  quite  as  many  as  the  town  could  stand,  while  in  the  interval 
of  six  months  others  might  open,  and  business  be  overdone.  Origi- 
nally competition  might  be  clean  and  legitimate  while  dming  the 
interval  mentioned  some  competitors  might  have  contracted  the 
scheme  of  'kiteing,'  or,  in  other  words,  use  questionable  methods  to 
obtain  business  which  temporarily  might  cripple  him.  He  might 
start  in  a  locality  where  there  was  no  other  trading  point  within 
ten  or  fifteen  miles,  while  in  six  months  there  might  be  new  towns 
started  which  would  di^^de  the  trade.  We  have  just  gone  through 
an  experience  where  hail  has  caused  a  great  deal  of  havoc  in  a  very 
small  scope  of  territory  and  practically  puts  our  customers  out  of 


METHODS   FOR  SAFEGUARDING  CREDITS  245 

business  or  at  least  forces  them  into  an  extensive  credit  business 
for  the  time  being." 

The  credit  man  "who  wrote  this  opinion  is  unquestion- 
ably right  when  he  says  that  the  changing  conditions  that 
are  constantly  entering  into  the  life  of  an  account  dis- 
parage the  possibility  of  establishing  any  hard  and  fast 
lines  or  limitations.  The  reasons  he  offers  for  doubting 
the  expediency  of  using  these  lines  are  all  worthy  of 
careful  consideration.  The  fact  of  a  customer  changing 
his  business  from  a  cash  to  a  credit  basis,  unfavorable 
crop  conditions,  unfair  competition,  and  damage  from  the 
elements,  all  constitute  good  reasons  for  holding  that  ab- 
solute adherence  to  credit  lines  is  impossible. 

The  point  to  be  debated,  and  one  which  readily  sug- 
gests itself  from  the  large  number  of  varying  opinions, 
is  whether  credit  lines  or  limitations  do  not  answer  a  use- 
ful purpose  and  are  not  of  considerable  value  to  the  credit 
man  in  the  prosecution  of  his  work.  It  is  undoubtedly 
true  that  no  matter  whether  a  credit  man  marks  a  line 
of  credit  upon  the  ledger  account  or  keeps  it  upon  a  credit 
reference  card  or  uses  it  in  connection  with  any  other 
office  records,  he  always  has  in  his  own  mind  an  idea  as 
to  the  amount  of  credit  he  would  be  willing  to  grant  to 
every  person  with  whom  he  is  doing  business.  It  is  in- 
dubitable that  after  a  credit  man  has  considered  the  infor- 
mation he  has  acquired  in  regard  to  an  account,  if  he 
will  sell  to  the  person  at  all,  there  immediately  springs 
into  his  mind  a  thought  as  to  about  the  amount  he  would 
be  willing  that  person  should  owe  to  his  concern.  It  is 
this  mental  record  or  reservation  which  is  the  inherent 
guide  of  the   credit  man  in  his  treatment   of  accounts. 

But  even  while  he*  carries  within  his  own  mind  an  idea 
17 


246  CREDIT  AND  ITS  USES 

as  to  the  amount  the  customer  should  owe  at  any  one 
time,  it  is  of  benefit  to  him  to  make  a  record  of  the  amount 
beyond  which  he  believes  the  account  should  not  go. 
Again,  where  a  credit  man  is  compelled  for  different  rea- 
sons to  absent  himself,  whether  through  illness  or  any 
other  reason,  it  is  not  a  good  idea  that  there  should  be 
no  record  left  by  him  as  to  how  the  different  accounts 
should  be  handled.  Where  he  has  placed  a  line  of  credit 
against  accounts,  it  is  reasonable  to  suppose  that  these 
lines  are  within  the  safety  mark.  During  his  absence 
there  is  little  danger  of  an  imsatisfactory  account  being 
added  to,  providing  his  credit  information  is  recorded  with 
promptitude  and  is  subject  to  ready  reference.  While 
conceding  the  impracticability  of  credit  lines  being  invio- 
lably respected,  it  will  not  be  denied  that  in  many  instances 
they  are  of  great  advantage ;  and  until  some  better  method 
of  governing  this  question  can  be  devised  they  will  un- 
doubtedly continue  to  be  an  element  of  credit  office 
administration. 

FIRE   INSURANCE  AND  ITS   RELATION  TO  CREDIT 

In  addition  to  desiring  that  a  customer  shall  be  a  per- 
son of  good  character,  with  sufficient  capacity  to  conduct 
the  business,  and  also  the  reasonable  capital  required  for 
its  prosecution,  the  credit  man  finds  it  necessary  to  assure 
himself  against  the  possibility  of  losses  arising  through 
causes  that  may  be  wholly  beyond  the  control  of  the 
customer.  A  man  may  be  doing  a  successful  business, 
but  in  the  event  of  his  property  being  destroyed  by  fire, 
his  failure  to  carry  a  sufficient  amount  of  fire  insurance 
might  render  it  impossible  for  him  to  discharge  his  in- 
debtedness in  full. 


METHODS   FOR  SAFEGUARDING  CREDITS  247 

It  is  customary  when  a  man  is  applying  for  credit  to 
ask  him  orally  whether  he  is  insured  and  what  amount  of 
insurance  he  carries,  or  if  the  opportunity  to  consult  with 
him  directly  is  not  afforded,  to  insist  upon  his  answering 
this  question  in  some  form,  and  preferably  when  he  is 
making  a  statement  of  his  affairs.  For  this  reason,  in 
every  well-prepared  property  statement  there  is  an  inquiry 
as  to  whether  or  not  the  person  making  the  statement 
carries  fire  insurance  and  to  what  extent.  When  the  credit 
man  learns  how  much  insurance  is  being  carried  by  the 
customer,  or  prospective  customer,  he  is  not  in  doubt  as 
to  whether,  in  the  event  of  fire,  that  person  should  be  in 
a  position  to  discharge  his  indebtedness  without  injury 
to  his  creditors,  always  providing  that  the  statement  as 
to  the  insurance  being  carried  is  an  honest  one,  and  fur- 
ther, that  the  insurance  has  been  obtained  from  com- 
panies that  are  solvent  and  will  be  able  to  pay  losses  when 
called  upon  to  do  so. 

Xo  business  man  could  undertake  a  risk  more  fraught 
with  danger  than  to  dispense  credit  among  those  who  are 
carrying  no  fire  insurance,  for  the  elements  of  good  char- 
acter and  business  capacity  would  be  of  no  avail  in  pre- 
venting a  loss  under  such  conditions,  and  it  would  only  be 
the  existence  of  ample  capital  that  would  prove  efficacious 
in  preventing  a  loss  under  such  circumstances.  In  the 
great  mass  of  business  enterprises  the  capital  invested  rep- 
resents the  merchant's  all,  and  it  is  rarely  that  a  merchant 
uninsured,  who  suffers  a  fire  loss,  is  able  to  discharge  his 
indebtedness  in  full. 

It  is  necessary  that  a  merchant  should  be  insured  and 
for  a  sufficient  amount.  Where  he  overlooks  his  inter- 
ests by  failing  to  carry  insurance,  it  is  the  credit  man's 


248  CREDIT  AND  ITS  USES 

duty  to  his  house  as  well  as  to  his  patrons  to  express  a 
kindly  word  of  advice  upon  this  point.  In  a  series  of 
articles  published  by  the  ISTational  Association  of  Credit 
Men  on  the  question  of  "  Fire  Insurance  an  Essential  to 
Credit,"  several  cases  from  actual  experience  are  quoted, 
showing  that  the  thoughtfulness  of  credit  men  in  this  re- 
8pe<;t  has  prompted  the  merchant  to  increase  his  insurance, 
and  thus  saved  his  creditors  and  himself  from  a  serious 
loss.  In  the  series  of  articles  mentioned  is  one  by  Mr. 
George  K.  Barclay,  Vice  President  of  the  Simmons  Hard- 
ware Co.  of  St.  Louis,  in  which  he  says : 

"The  Simmons  Hardware  Co.  has  for  several  years  past  issued 
to  its  traveling  men  instructions  about  the  close  of  the  year  to 
interview  their  trade  regarding  the  matter  of  insurance,  ascertain 
the  amount  carried,  etc.  This  information  is  placed  on  record  in 
our  Credit  Department,  and  where  we  find  our  customers  are  without 
msurance,  we  bring  the  matter  to  their  attention  in  a  way  to  cause 
no  offense,  and  feel  sure  we  have  influenced  a  great  many  retail 
merchants  to  avail  themselves  of  the  protection  offered  by  insurance 
companies." 

The  plan  followed  by  the  concern  mentioned  affords  an 
excellent  example  to  all  other  houses,  and  where  a  concern 
is  not  in  a  position  to  communicate  with  its  customers 
through  the  medium  of  traveling  salesmen,  methods  can 
be  devised  to  accomplish  the  same  result  through  corre- 
spondence. 

COMPARATIVE-STATEMENT   FORMS 

The  purposes  and  advantages  of  comparative  state- 
ments in  banking  credit  have  been  explained;  and  the 
same  reasons  that  would  recommend  the  use  of  compara- 
tive-statement forms  in  banking-credit  departments  should 


METHODS  FOR  SAFEGUARDING  CREDITS  ^4^ 

also  promote  their  use  in  commercial  credit  oflSces.  The 
use  of  the  comparative-statement  form  is  a  banking  custom 
more  than  a  commercial  one.  Credit  men  of  commercial 
establishments  who  have  had  banking  experience  and 
through  it  acquired  the  habit  of  using  a  comparative-state- 
ment form,  employ  it  and  are  of  the  opinion  that  the  results 
of  its  use  fully  justify  the  extra  labor  entailed. 

Some  credit  men  have  expressed  the  opinion  that  when 
they  receive  a  new  statement  from  a  customer  and  compare 
it  with  the  last  statement  received  from  him,  and  consider 
the  results  of  the  comparison,  this  method  satisfies  all  re- 
quirements. This  plan,  however,  involves  what  would  be 
called  a  mental  comparison  and  cannot  be  as  effectual  as 
the  method  by  which  figures  are  properly  tabulated,  and 
can  be  referred  to  at  any  time  during  a  year  without  the 
necessity  of  turning  over  a  great  many  papers  and  making 
a  computation  to  decide  exactly  what  the  results  of  the  com- 
parison may  be. 

The  principal  reason  that  has  operated  against  the  use 
of  comparative-statement  forms  in  commercial  credit  is  that 
merchants  are  not  in  the  habit  of  demanding  statements 
from  customers  with  the  same  regularity  that  banks  follow 
the  practice.  Further,  in  many  cases  a  customer  will  re- 
fuse to  fill  out  a  statement  form  sent  him  by  a  wholesaler 
or  jobber,  but  is  perfectly  willing  to  send  a  statement  pre- 
pared in  his  own  way  (very  often  on  a  letter  head),  and  the 
recipient  feels  that  this  is  the  best  he  can  get.  Ho  accepts 
it  in  that  spirit  and  hardly  thinks  it  worth  while  to  make 
any  tabulation  of  the  facts  contained  in  such  a  statement, 
although  such  conditions  do  not  disparage  the  use  of  a  com- 
parative-statement form.  Another  reason,  and  probably 
the  strongest  one,  that  has  prevented  the  use  of  comparative 


250  CREDIT  AND   ITS   USES 

statements  by  cominercial  credit  men  is  that  they  would 
have  to  be  filled  out  by  some  one  in  the  credit  office,  and 
the  fact  is  that  the  time  of  the  credit  man  and  his  assistants 
is  usually  preoccupied  with  what  might  be  called  the 
regular  work.  As  the  comparative  statement  has  not  up  to 
this  time  taken  a  very  prominent  place  in  credit  office  work, 
the  avoidance  of  this  and  any  other  duty  that  does  not  seem 
to  be  absolutely  pressing,  readily  approves  itself  to  the 
credit  man.  Although  the  preparation  of  a  comparative 
statement  means  a  little  extra  work  at  the  time  each  prop- 
erty statement  is  received,  the  advantage  of  having  on  one 
form  all  the  essential  details  of  every  statement  a  man  has 
submitted  to  his  creditor  for  a  number  of  years  is  one  that 
credit  men  can  hardly  afford  to  overlook. 


CHAPTER    XV 

THE  CREDIT  MAN  :  DUTIES,  METHODS,  AND  CHAEACTERISTICS 

The  duties  of  the  credit  man  pertain  to  the  acquire- 
ment of  information  respecting  the  credit  standing  of 
people,  the  consideration  of  the  questions  that  determine 
a  person's  credit  desirability,  credit  office  management,  the 
collection  of  accounts,  and  the  adjustment  of  doubtful  and 
failed  accounts. 

In  some  large  establishments  the  credit  man  takes 
charge  of  credits  only,  the  collection  of  accounts  being 
supervised  by  others.  This  division  of  labor  is  at  times 
necessary,  for  the  reason  that  the  credit  man,  having  so 
many  accounts  upon  which  to  pass,  would  not  have  the 
requisite  time  to  give  to  the  questions  of  collections  and 
adjustments.  In  other  concerns  the  credit  man  is  supposed 
to  discharge  all  the  duties  enumerated  and  also  to  take 
charge  of  the  accounting  department.  If  this  does  not 
conflict  with  his  giving  the  necessary  attention  to  his  dis- 
tinctively credit  duties,  it  is  in  no  sense  a  detriment  but 
greatly  to  his  advantage,  as  it  broadens  his  experience. 
The  greater  familiarity  a  credit  man  cultivates  with  all 
branches  of  a  business  the  better  for  him.  This  experience 
is  something  that  he  will  have  reason  to  prize  in  after  life. 

The  labors  of  the  credit  man  which  postdate  the  open- 
ing of  an  account  call  for  a  high  order  of  ability.    He  must 

251 


252  CREDIT  AND  ITS  USES 

exhibit  that  power  of  observation  enabling  him  to  review 
accounts  with  the  knowledge  and  foresight  so  essential  to 
the  conduct  of  well-regulated  credits.  His  hardest  work 
has  then  begun.  The  means  that  he  adopts  depend  to  a 
great  extent  upon  his  own  originality  and  industry.  He 
should  never  miss  an  opportunity  to  consult  with  the  sales- 
men to  learn  from  them  whether  their  customers  are  pro- 
gressing or  retrogressing.  The  credit  man  may  also  secure 
information  by  discussing  his  customers  with  other  credit 
men  or  private  persons.  Such  discussion  should  be  con- 
ducted in  a  diplomatic  manner  and  never  initiated  in  what 
would  appear  to  be  a  spirit  of  anxiety.  He  should  also 
make  prompt  and  regular  examinations  of  the  change  lists 
issued  by  the  mercantile  agencies  or  reporting  concerns. 
Very  often  important  developments  in  credit  work  have  the 
merest  rumors  or  scraps  of  information  as  their  founda- 
tion, and  the  credit  man  who  can  utilize  this  character  of 
information,  no  matter  how  trivial  it  may  be,  is  the  one 
who  possesses  the  instinctive  capacity  for  credit  work. 

System  is  one  of  the  most  important  factors  in  business 
management,  and  there  is  no  department  of  business  life 
where  it  is  more  necessary  than  in  credit  work.  There  arc 
so  many  details  in  credit  work  that  the  credit  man  is  liable 
to  stand  in  his  own  light  unless  he  arranges  and  dispatches 
his  duties  with  systematic  precision. 

The  credit  man's  habits  should  be  steady,  which  is  a 
concession  to  system ;  it  would  be  well  for  him  to  have 
regular  hours  during  which  he  would  consider  certain 
branches  of  his  work;  for  instance,  to  give  the  first  part 
of  his  day  to  consulting  the  morning  mail,  then  to  consider 
orders  and  applications  for  credit — this  business  demands 
prompt  attention  and  cannot  be  side-tracked — he  may  then 


THE  CREDIT  MAN  253 

turn  to  his  correspondence,  after  this  take  up  the  question 
of  collections,  and  so  on,  so  that  he  would  not  only  become 
accustomed  to  the  routine,  but  that  others  may  know  the 
best  times  to  approach  him  without  unduly  interfering 
■with  his  duties.  This  progTamme  is  a  mere  suggestion,  but 
its  application,  either  in  modified  or  amplified  form, 
would  be  of  assistance  to  the  credit  man  in  establishing  a 
reputation  for  systematic  management  that  every  good 
business  man  desires  to  possess. 

CREDIT  OFFICE  MECHANICS 

The  duties  of  the  credit  office  include  the  arrangement 
and  preservation  of  credit  information.  It  is  important 
that  the  records  be  promptly  filed  in  order  that  they  may 
be  in  convenient  form  for  reference.  It  would  be  useless 
to  attempt  to  prescribe  any  single  plan  for  the  filing  of 
credit  information,  as  the  ideas  of  credit  men  on  this  sub- 
ject are  extremely  varying.  No  particular  principle  is 
involved  and  consequently  the  credit  man  avails  himself 
of  the  devices  that  are  most  pleasing  to  his  fancy.  The  end 
desired  is  to  provide  a  system  demanding  the  least  possible 
labor  and  at  the  same  time  conducing  to  quick  action  when- 
ever it  is  necessary  to  refer  to  these  papers. 

CREDIT   REFERENCE  CARDS 

The  crux  of  good  credit  work  lies  in  the  ability  of  the 
credit  man  to  handle  a  larger  amount  of  sales  each  year 
and  reduce  the  average  of  losses  from  bad  debts.  Any  man 
can  avoid  making  bad  debts  if  he  desires  to  do  so ;  in  other 
words,  he  can  attain  this  result  by  arbitrarily  eliminating 
every  account  excepting  those  of  undoubted  standing. 
This  policy,  if  followed,  would  mean  that  the  sales  of  a 


254  CREDIT  AND  ITS  USES 

house  might  be  reduced  to  such  an  extent  as  to  impair  the 
})ossibility  of  profit-making.  There  is  a  very  large  per- 
centage of  trade  that  must  be  done  with  people  whose 
responsibility  is  not  the  highest,  and  the  great  percentage 
of  them  are  safe  debtors ;  there  is  still  another  class  looked 
upon  as  of  doubtful  responsibility,  and  even  many  of  them 
manage  to  pay  their  accounts  within  a  reasonable  time, 
although  it  is  in  these  two  classes  that  the  element  of  risk 
largely  prevails.  Mr.  Cannon,  in  his  paper  on  "  Credit, 
Credit  Man,  and  Creditor,"  says  on  this  point : 

"  It  is  not  a  question  of  how  many  goods  can  be  sold,  but  what 
volume  of  business  can  be  transacted  with  only  minimum  losses 
from  bad  debts,  and  how  sales  can  be  increased  each  year,  with  a 
decrease  in  the  percentage  of  losses." 

The  number  of  accounts  handled  by  the  larger  concerns 

in  the  staple  lines  has  become  so  great  that  it  is  an  impossi- 
bility for  a  credit  man  to  remember  all  the  essential  facts 
relating  to  each  account.  If  his  memory  be  good,  he  may 
be  able  to  retain  a  general  idea  as  to  the  status  of  each  ac* 
count ;  still,  there  are  so  many  details  involved  that  if  he 
attempts  to  treat  them  all  from  memory,  he  will  overtax 
himself.  In  order  to  obviate  this  difiiculty  the  card-index 
system  has  been  employed  to  provide  the  credit  man  on 
short  notice  with  the  status  of  each  account.  He  can  use 
these  cards  either  in  interviews  or  in  handling  collections 
or  general  correspondence.  The  credit  man  of  one  of  the 
largest  industrial  corporations  has  given  the  writer  the  fol- 
lowing description  of  his  method.  It  is  a  very  interesting 
illustration  of  the  method  and  its  utility: 

"We  use  a  large  filing  case  containing  folders,  placed  vertically, 
and  nimabered  from  1  upward,  each  representing  some  customer, 
or  prospective  customer.    An  index  book  gives  the  mmaber  of  the 


THE  CREDIT  MAN  255 

folder  opposite  the  customer's  name.  Each  folder  contains  all 
the  information  that  we  have  been  able  to  secure  concerning  the 
credit  status  of  the  customer,  including  correspondence  appertaining 
to  the  account,  which  might  in  future  shed  some  Ught  upon  our  busi- 
ness relations. 

"In  conjunction  with  tliis,  we  have  a  card  system  for  the  pur- 
pose of  ready  reference,  which,  aside  from  being  very  convenient, 
we  have  found  almost  a  necessity.  There  is  a  card  for  each  cus- 
tomer, bearing  on  its  face  a  number  to  correspond  with  that  of  the 
folder,  and  also  the  name,  address,  business,  ratings,  terms,  and 
expiration  and  tonnage  of  the  contract.  On  the  reverse  of  the 
card  is  a  digest  of  the  information  at  our  command  in  regard  to  the 
customer.  This  illustration  shows  a  specimen  card,  picked  out  at 
random,  a  fictitious  name  being  substituted. 


No.  305. 

Name — John  Doe  Publishing  Co. 
Address — Doeville,  B.  J. 
Business — Pubs.  'Morning  Screecher.' 
Ratings —  Terms!  Net  30  days. 

B.  35M-50— Mist  July,  1905. 
D.  35M-50M— Good. 
Contract:  1,600  tons.     Jan.  1,  1906. 


Incorporated  1888,  under  laws  B.  J.,  auth.  cap. 
50M;  25M  paid  in.  Statement  Aug.  '02:  Assets  126M; 
surplus  72M.  Well  regarded,  reported  prompt  pay 
and  sold  requirements  without  hesitation. 

Estimated  worth  40^1  net. 

D.— 2-25-04. 

Mar.  '04:  Gave  mtge.     30M  covering  propertj% 

Jan.  '05:  In  view  of  mtge.  capital  rating  withdrawn. 


"This  card  is  kept  up  to  date,  any  change  in  the  affairs  of  a 
customer  worthy  of  note  being  added.    Thus  I  can  hold  the  history 


256  CREDIT  AND  ITS  USES 

of  a  customer  in  the  palm  of  my  hand  while  conversing  with  him. 
AVhere  the  credit  man  has  to  manage  hundreds  of  accounts,  he  is 
very  likely  not  to  remember  important  details  about  a  customer 
at  the  proper  moment,  and  this  card,  I  think,  will  obviate  such  a 
possibility.  For  instance,  I  can  hear  somebody  in  the  outer  office 
inquiring  for  me,  the  clerk  will  ask  his  name,  which  is  'Mr.  John 
Doe.'  I  then  recall  that  'Mr.  John  Doe'  was  to  call  this  week  in 
reference  to  some  accommodation.  While  he  is  being  admitted, 
I  secure  the  customer's  card,  read  it  quickly,  and  know  without 
hemming  and  hawing  just  what  to  do.  Also  in  approving  a  large 
number  of  orders,  these  cards  bring  pertinent  facts  to  mind." 

Credit  reference  cards  are  not  used  to  any  gi'eat  ex- 
tent. Some  credit  men  prefer  to  look  over  the  credit  in- 
formation upon  a  man  and  also  consult  the  ledger  before 
discussing  with  him  the  question  of  his  slowness,  an 
extension  of  credit,  or  an  extension  of  time  on  an  account 
that  may  be  owing.  If  the  material  that  should  be  incor- 
j)orated  in  the  credit  reference  cards  is  tabulated  promptly, 
as  it  should  he,  the  credit  man  is  saved  many  steps,  and 
there  is  given  him  in  a  brief  space,  just  as  explained  in  the 
quotation,  the  data  he  should  have  before  him. 

Some  years  ago  the  ^STational  Association  of  Credit 
Men  issued  a  credit  reference  card  in  connection  with  other 
forms  for  credit-office  use.  This  card  was  an  extremely 
simple  form,  4|  X  21  inches,  and  could  be  so  arranged  as 
to  contain  entries  referring  to  the  amounts  of  the  sales, 
method  of  payment,  and  agency  ratings  for  a  period  of 
eight  years ;  in  addition  to  this,  leaving  a  small  space  for 
notes  that  it  might  be  necessary  to  make  upon  the  card. 
It  requires  considerable  labor  to  keep  these  cards  up  to 
date,  but  the  benefits  to  be  realized,  especially  in  the  credit 
office  of  a  large  house,  certainly  justifies  the  expense  of 
making  the  tabulations  with  promptitude. 


THE  CREDIT  MAN  257 

THE  TACTFUL  CREDIT  MAN 

A  credit  man  of  experience  realizes  to  what  an  extent 
he  is  dependent  upon  the  good  will  of  others  for  credit 
information  and  other  assistance  which  can  be  rendered 
by  his  associates.  It  is  necessary  that  he  should  be  tact- 
ful in  his  bearing  toward  those  associated  with  him,  but 
just  as  essential  that  he  should  exhibit  these  qualities  in 
his  relations  with  customers.  When  a  customer  is  in  dif- 
ficulties he  will  be  more  willing  to  make  known  the  ex- 
act condition  of  his  affairs,  and  at  an  earlier  and  therefore 
safer  time,  to  a  credit  man  he  looks  upon  as  a  friend  than 
to  one  he  does  not  hold  in  that  regard.  If  every  case  of 
financial  embarrassment  were  taken  in  hand  at  the  proper 
time,  which  means  when  the  first  acute  state  of  embarrass- 
ment develops,  an  amazingly  large  percentage  of  the  losses 
from  bad  debts  could  be  saved  and  the  retirement  of  many 
men  from  business  obviated. 

CREDIT-OFFICE   CORRESPONDENCE  " 

While  the  credit  man  may  meet  many  of  the  customers 
of  his  house,  there  are  a  large  number  of  them  he  never 
has  an  opportunity  to  meet,  for  the  reason  that  they  rarely 
visit  the  market.  When  they  do,  it  may  not  be  convenient 
for  them  to  call  at  the  credit  office,  although  the  practice  of 
liaving  the  credit  man  meet  every  customer  Avho  visits  a 
business  house  is  one  that  should  be  followed.  If  it  be 
only  to  exchange  the  most  formal  gi*eeting,  it  is  well  that 
he  should  have  an  opportunity  to  see  the  man  to  whom  he 
gives  credit,  and  have  the  customer  see  the  person  with 
whom  he  must  necessarily  conduct  considerable  correspond- 
ence during  the  year. 


258  CREDIT  AND  ITS  USES 

The  commonest  faults  appearing  in  business  corre- 
spondence are  two :  undue  brevity  and  verbosity.  A  letter 
that  is  too  brief  gives  the  recipient  the  impression  that 
the  one  writing  it  was  pressed  for  time  or  did  not  consider 
the  subject  of  sufficient  importance  to  give  it  more  than 
fleeting  attention.  Letters  that  deal  with  too  much  detail 
or  are  unnecessarily  long  rarely  possess  any  force  and  are 
annoying  to  business  people,  for  they  have  not  the  time  to 
give  to  unnecessary  words  or  phrases.  That  which  is  most 
desired,  and  naturally  that  which  it  is  most  difficult  to 
attain,  is  the  mean  between  these  two  extremes,  and  the 
credit  man  should  endeavor  to  have  his  correspondence 
represent  the  mean  and  neither  of  these  extremes. 

THE   FALLIBILITY   OF  THE   CREDIT  MAN 

One  of  the  many  debatable  questions  in  the  administra- 
tion of  credit  is  whether  the  credit  man  should  be  clothed 
with  full  authority  to  pass  upon  the  credits  of  his  con- 
cern, or  whether  there  should  be  any  reversal  of  his  judg- 
ment. It  is  a  common  practice  for  salesmen  to  appeal 
from  the  decision  of  the  credit  man  in  regard  to  accounts 
and  induce  his  superiors  to  decide  upon  a  course  contrary 
to  that  which  he  has  outlined.  There  is  much  to  be  said 
on  both  sides  of  this  question.  The  credit  man  has  to  ac- 
quire his  experience  in  the  same  way  that  other  business 
men  have  acquired  theirs.  The  first  years  of  his  experience 
are  largely  years  of  tutelage,  and  there  is  no  good  reason 
why  his  judgments  should  pass  unquestioned.  A  man  may 
be  appointed  to  the  position  of  credit  man  and  his  ideas 
may  be  extremely  large,  especially  as  to  the  amount  of 
credit  he  would  accord  to  customers.     It  may  be  that  the 


THE  CREDIT  MAN  259 

concern  is  not  in  a  position  to  spread  its  credit,  and  the 
members  of  the  concern  are  justified  in  exercising  a  re- 
straining influence  upon  the  credit  man  if  he  displays  a 
propensity  to  extend  credits  beyond  the  means  of  the  house. 
Nothing  can  be  lost  by  conference  between  the  credit  man 
and  his  firm  on  a  point  such  as  this,  and,  in  fact,  many 
others  that  come  to  the  surface  in  credit  work.  The  credit 
man  may  never  have  had  an  opportunity  to  meet  the  cus- 
tomer, either  in  his  own  office  or  at  the  customer's  place  of 
business;  all  that  he  knows  has  come  to  him  through  re- 
ports which  may  be  somewhat  faulty,  as  reports  often  are ; 
and,  after  all,  if  a  house  be  willing  to  trust  a  man,  even 
though  the  opinion  of  the  members  of  the  firm  be  dif- 
ferent from  that  of  the  credit  man,  it  does  not  always  fol- 
low that  the  house  is  wrong  and  the  credit  man  right. 

After  a  man  occupies  the  position  of  credit  man  for 
a  long  period  of  years  it  is  very  seldom  that  there  is  any 
dissent  from  his  views  or  that  an  appeal  is  taken  from  his 
decisions.  The  house  has  then  realized,  and  the  salesmen 
have  come  to  learn  from  the  excellent  record  the  credit 
man  has  made,  that  it  is  advisable,  unless  some  unusual 
circumstances  should  suggest  otherwise,  that  the  credit 
man  be  permitted  to  pass  on  the  credits  without  let  or 
hindrance. 

PAPERS    AND    PERIODICALS    AS    SOURCES    OP 
CREDIT    INFORMATION 

There  is  another  source  of  credit  information  which 
can  be  utilized  to  advantage,  and  that  is  regular  consulta- 
tion of  the  trade  and  daily  papers  for  items  affecting  finan- 
cial news,  crop  reports,  industrial  conditions,  depressions, 
and  labor  difficulties,  and  also  notices  in  respect  to  litiga- 


260  CREDIT  AND   ITS  USES 

tion  affecting  debtors.  Mr.  H.  H.  Sanger,  in  his  article 
on  "  A  System  for  a  Bank's  Credit  Department "  in  The 
Credit  Man  and  His  Work,  calls  attention  to  this,  and 
expresses  the  opinion  that  credit  men  should  carefully  read 
the  financial  pages  of  the  morning  papers.  To  the  writer's 
knowledge  there  is  a  certain  banking  credit  department 
where  it  is  the  special  duty  of  a  clerk  to  perform  this  class 
of  work  every  morning,  and  everything  that  would  possibly 
be  of  any  interest  to  his  credit  department  is  underscored 
and  clipped  so  that  it  may  be  filed  with  the  regular  credit 
information ;  in  addition  to  which  the  clippings  are  care- 
fully looked  over  by  the  credit  man  and  later  in  the  day 
referred  to  the  officer  of  the  bank  who  is  in  direct  charge 
of  credit  matters.  Possibly  through  this  information  lines 
of  action  are  suggested  and  initiated  long  before  other 
banks  that  are  not  as  careful  in  the  acquirement  of  this 
particular  form  of  data  have  discovered  any  developments 
that  might  lead  them  to  take  similar  action. 

THE  CREDIT  MAN  AS  A  STUDENT  OF  LAW 

In  all  discussions  of  credit  w^ork  and  the  attributes  of 
credit  men  there  is  some  mention  of  the  question  as  to  how 
far  a  credit  man  should  familiarize  himself  with  law.  In 
certain  works  on  the  subject  of  credit  it  has  been  the  prac- 
tice to  insert  a  number  of  legal  decisions  bearing  upon 
debtor's  responsibility  under  signed  statements,  and  kin- 
dred subjects.  Xearly  all  credit  men  consult  the  legal 
periodicals,  and  every  encouragement  should  be  given  to 
this  practice.  In  addition  to  this,  credit  men  are  studying 
law,  feeling  that  it  wiU  be  of  great  help  to  them  in  the 
performance  of  their  duties.  ISTone  of  this,  however, 
means  that  the  credit  man  should  become  his  o\vn  lawyer. 


THE  CREDIT  MAN  261 

Credit  work  is  one  distinct  profession  and  the  law  is  an- 
other. To  attempt  to  merge  them  in  practice  would  prob- 
ably impair  the  efficiency  of  the  duties  discharged.  Most 
credit  men  have  not  the  leisure  to  devote  themselves  to  the 
study  of  law.  Those  credit  men  who  have,  no  doubt  with 
great  sacrifice,  given  their  time  to  this  study  have  not  been 
able  to  acquire  more  than  a  general  knowledge  of  its  mean- 
ings. A  smattering  of  law  is  helpful  in  increasing  a  man's 
general  knowledge,  but  it  does  not  mean  that  every  man 
who  has  read  some  law  is  competent  to  act  as  counsel. 

Hardly  any  two  cases  arising  in  litigation  are  exactly 
alike.  While  the  same  law  may  apply  to  them,  in  nearly 
every  case  there  is  some  little  detail  that  is  different  from 
that  of  the  other.  If,  therefore,  a  credit  man  has  a  matter 
which  he  considers  should  be  passed  upon  by  a  la^vyer  it 
is  essential  that  he  should  consult  a  man  who  is  thoroughly 
advised  of  the  daily  developments  under  court  decisions. 
A  decision  rendered  in  the  month  of  January  in  a  certain 
State  in  regard  to  the  liability  of  a  debtor  under  a  signed 
property  statement,  whether  it  be  a  civil  or  a  criminal 
matter,  may  not  be  of  the  slightest  value  in  ten  months 
from  that  time.  A  credit  man  may  understand  the  laws 
of  a  certain  State  in  respect  to  property  statements  or 
chattel  mortgages,  deeds  of  trust,  etc.,  but  this  knowledge 
may  be  of  no  value  to  him  if  he  attempts  to  apply  it  to  a 
person  residing  in  a  different  State.  Prior  to  the  passage 
of  the  National  Bankruptcy  Act  it  was  necessary  that  a 
credit  man  should  have  a  good  deal  of  general  information 
respecting  the  State  collection  laws.  This  he  gradually 
assimilated,  because  of  his  conference  and  correspondence 
with  lawyers.  It  might  be  said  that  under  the  N'ational 
Bankruptcy  Act,  if  a  credit  man  is  well  informed  on 
18 


262  CREDIT  AND  ITS  USES 

bankruptcy  law,  he  does  not  require  active  counsel.  This 
is  also  a  dangerous  position  to  take,  for  new  law  is  being 
written  in  bankruptcy  jurisprudence  every  day.  Tlie 
courts  are  rapidly  developing  a  most  extensive  range  of 
interpretation  of  this  law,  and  action  taken  without  the 
advice  of  competent  counsel  might  lead  to  unfortimate 
results.  The  writer's  views  are  those  of  a  layman  and 
one  who  has  had  considerable  practical  service  in  credit 
work,  and  they  are  designed  to  indicate  the  line  of  demar- 
cation beyond  which  the  credit  man  should  not  attempt  to 
perform  the  functions  of  the  lawyer. 


CHAPTER   XVI 


COLLECTIONS 


(A)  Collections:  Their  Nature — Systematic  Methods — • 
Unfavorable  Developments:  Their  Effects  Upon 
Further  Credit — Treatment  of  Tardy  Accounts — 
Collections  Through  Drafts:  Draft  Systems 

COLLECTIONS:    THEIR  NATURE 

The  collection  of  accounts  is  one  of  the  most  interest- 
ing duties  of  the  credit  man.  Every  good  credit  man  is 
not  a  good  collector  and  the  best  collectors  are  sometimes 
not  the  best  credit  men.  Some  men  possess  excellent  ca- 
pacity for  analyzing  credit  information  and  selecting  credit 
risks ;  but  they  fail  to  give  to  collections  the  same  efficient 
service,  and  in  this  way  nullify  the  good  effects  of  their 
preparatory  work.  Accounts  often  regarded  as  worthy 
may,  as  time  goes  on,  develop  certain  weaknesses.  Con- 
ditions may  develop  during  the  term  of  the  credit,  espe- 
cially if  it  be  a  long  one,  that  could  not  have  been  foreseen 
by  the  credit  man  or  anyone  else. 

Unless  accounts  are  collected  in  full  a  loss  results 
which,  if  pronounced,  adversely  affects  the  credit  man's 
administration.  The  functions  of  the  credit  office  are  de- 
signed to  prevent  losses ;  consequently,  when  losses  occur, 
it  is  supposed  that  the  credit  man  has  misjudged  the  char- 
acter of  the  account,  or  has  been  unable  to  effect  a  satis* 

263 


264  CREDIT  a:nd  its  uses 

factory  collection.     In  either  event  the  queetion  of  credit 
is  affected 

The  success  of  a  business  is  determined  to  a  large  ex- 
tent by  the  character  of  its  collection  service.  Unless  a 
house  makes  its  collections  with  promptitude  it  will  be 
embarrassed  by  lack  of  funds.  No  matter  how  ample  its 
facilities  for  credit  accommodation  at  its  bank  or  through 
other  friendly  sources,  there  comes  a  day  of  liquidation, 
when  it  must  depend  upon  the  funds  acquired  from  the 
collection  of  its  accounts.  Many  houses  have  been  forced 
into  insolvency  simply  because  their  accounts  were  not 
collected  promptly.  This  laxity  affords  opportunities  to 
debtors  for  many  kinds  of  imposition.  The  longer  an 
account  remains  uncollected  the  greater  the  liability  to 
certain  developments  which  make  it  impossible  for  a 
debtor  to  render  payment  at  all.  A  house  that  is  in  the 
habit  of  making  its  collections  with  the  celerity  that  should 
characterize  this  branch  of  credit  office  work  is  usually  a 
house  that  is  "  in  funds  "  and  has  occasion  to  ask  for  the 
least  accommodation;  in  addition,  it  commands  the  best 
terms  in  the  market  for  its  own  purchases,  as  people  are 
willing  to  extend  to  it  better  terms  or  discounts  than  they 
would  accord  to  those  from  whom  they  could  not  expect 
either  immediate  or  reasonably  prompt  payment.  Some 
houses  make  purchases  of  large  amounts  of  goods  at  low 
figures,  because  they  are  in  a  position  to  pay  cash,  or  at 
least  comply  with  the  shortest  possible  credit  term  that  the 
selling  house  may  suggest.  Having  bought  these  goods  on 
advantageous  terms,  they  are  in  a  position  to  offer  them 
to  the  trade  at  prices  that  readily  appeal  to  purchasers. 
Houses  without  the  means  of  prompt  payment  cannot  make 
such  purchases  and  consequently  are  unable  to  compete 


COLLECTIONS  265 

■with  their  more  fortunate  neighbors.  The  importance  of 
collections  in  this  relation  to  credit  work  cannot,  therefore, 
be  overestimated. 

The  character  of  accounts  has  a  material  bearing  upon 
the  possibilities  of  prompt  collection.  When  a  credit  man 
has  selected  customers  of  a  very  desirable  character,  little 
if  any  difficulty  need  be  looked  for  in  the  collection  of  the 
accounts,  providing  collection  is  resorted  to  with  prompti- 
tude. When,  on  the  other  hand,  the  credit  man  realizes 
that  some  of  the  accounts  he  has  selected  are  not  of  the 
first  class,  he  must  of  necessity  anticipate  difficulty  in  en- 
forcing prompt  collection.  Tt  has  already  been  intimated 
that  in  a  large  business  trade  cannot  be  confined  to  first- 
class  accounts  without  seriously  curtailing  the  sales,  which 
curtailment  might  be  harmful.  It  may  be  accepted  as  a 
truism  that  in  most  cases  a  man  can  anticipate  when  he 
accepts  an  account  just  what  will  be  the  possibilities  of 
prompt  collection.  The  prudent  credit  man  will  keep  the 
question  of  collections  constantly  before  him  from  the  time 
he  is  first  considering  an  account,  and  never  lose  sight  of 
the  fact  that  a  good  credit  also  involves  satisfactory  col- 
lections. 

Too  much  insistence  cannot  be  placed  upon  the  great 
merit  of  prompt  action  when  an  account  becomes  due. 
No  debtor  should  have  any  objection  to  receiving  on  the 
due  date  a  statement  of  his  account.  A  man  has  the  right 
to  ask  for  that  which  is  due  him  at  the  end  of  the  term 
nominated  in  the  bond,  and  his  best  interests  demand  that 
he  should  avail  himself  of  that  right.  It  is  remarkable  to 
■what  an  extent  men  are  inclined  to  pay  their  accounts 
quickly  if  payment  is  demanded  with  promptness.  On 
the  other  hand,  if  a  house  is  dilatory  in  requesting  pay- 


266  CREDIT  AND  ITS  USES 

ment,  debtors  will  be  just  as  dilatory  in  rendering  settle- 
ments. Another  thing:  the  question  of  payment  is  deter- 
mined largely  by  existing  conditions.  If  a  man  receives 
a  statement  of  an  account  due  and  he  has  had  a  satisfactory 
business  for  a  few  days,  he  is  more  apt  to  make  payment 
promptly  than  if  circumstances  were  not  so  propitious,  so 
that  the  credit  man  who  asks  for  payment  when  it  is  due 
is  usually  the  man  who  receives  it  promptly. 

SYSTEMATIC  METHODS 

When  a  credit  man  is  supposed  to  direct  the  collection 
of  a  large  number  of  accounts,  it  is  necessary  that  he  em- 
ploy some  systematic  method  whereby  he  may  be  well  in- 
formed in  regard  to  their  status.  With  a  view  to  system- 
atizing and  minimizing  the  labor  imposed  upon  the  credit 
man  incident  to  collection  work,  many  systems  of  card 
indices  have  been  invented  and  are  in  use.  These  cards 
are  on  the  same  general  order  as  the  credit  reference  cards 
described,  and  there  is  no  reason  why  one  card  could  not 
be  made  to  answer  the  purposes  of  both  credit  and  collec- 
tion references.  There  are  also  cards  known  as  maturity 
slips,  used  to  indicate  the  maturity  of  accounts.  These 
cards  are  kept  in  a  tickler,  so  that  the  credit  man  (or 
collector  in  the  credit  oflBce)  may  be  reminded  that  such 
accounts  are  either  due  on  certain  dates  or  that  payment 
on  overdue  accounts  should  be  forthcoming  upon  such 
dates. 

The  institution  of  tickler  systems  has  undoubtedly 
conduced  to  system  in  collections  and  has  also  influenced 
a  better  attention  to  collections.  It  is  an  easy  matter  for 
a  credit  man  or  his  collector  to  turn  to  a  tickler,  pick  out 
the  cards  that  stand  in  a  certain  day,  and  see  with  a  very 


COLLECTIONS  267 

few  glances  from  whom  payments  should  be  forthcoming. 
This  is  a  great  improvement  over  the  old  method,  accord- 
ing to  which  credit  men  depended  very  largely  upon  their 
memories  or  memoranda  made  upon  blotters  or  diaries, 
for  these  memoranda  usually  referred  only  to  extreme 
cases  and  not  to  a  large  number  of  accounts,  full  informa- 
tion in  regard  to  which  can  be  obtained  within  a  few 
minutes  by  consulting  the  tickler.  The  following  rather 
novel  plan  has  been  recommended  by  a  credit  man  of  a 
well-kno\\Ti  Xew  York  concern: 

"All  statements  for  accounts  just  matured  are  handed  to  a 
stenographer  whose  duty  it  is  to  make  a  record  of  the  statement; 
gi\'ing  date  of  bills,  amount  in  total,  name,  address,  and  ledger  folio. 

"This  is  accomplished  by  the  carbon  system,  to  wit:  Slips  are 
cut  similar  in  size  to  an  envelope,  as  to  width,  and  a  trifle  larger  as 
to  length ;  thus  the  operator  is  able  to  address  her  enA'elope  and  make 
the  major  portion  of  her  record  at  one  writing,  and  other  details 
being  filled  in  without  removing  the  matter  from  the  machine. 

"These  slips  are  then  placed  in  a  daily  tickler,  allowing  reason- 
able maihng  time  for  a  response. 

"Each  day  these  slips  are  removed  from  the  tickler  by  the 
assistant  credit  man,  whose  duty  it  is  to  look  them  up,  and  dispose 
of  those  paid,  and  hand  me  those  remaining  unsettled." 

Although  much  more  could  be  said  in  favor  of  suchi 
systematic  methods  as  have  been  suggested,  there  is  no 
evidence  that  they  are  universally  popular  among  credit 
men.  Some  men  say  that  after  experimenting  with  card 
systems  they  have  found  it  advisable  to  discard  them  en- 
tirely and  depend  upon  the  old-fashioned  method  of  look- 
ing after  collections.  It  is  found,  however,  that  it  is  usu- 
ally among  houses  that  do  not  have  a  large  number  of 
accounts  that  the  card  and  tickler  systems  are  not  popular ; 
although  a  credit  man  who  claims  to  have  eight  thousand 


268  CREDIT   AND   ITS  USICS 

accounts  has  told  the  writer  that  he  prefers  the  old  method 
of  examining  his  ledger  at  least  twice  a  month  and  depend- 
ing upon  it  for  such  information  as  he  requires  from  time 
to  time  in  respect  to  accounts.  It  has  also  been  the  writer's 
ex])erience  that  many  other  credit  men  have  a  strong  pref- 
erence for  this  method  of  examining  ledgers.  Some  also 
believe  that  it  is  a  wise  thing  to  go  over  the  ledgers  with 
the  salesmen  and  discuss  each  account  in  which  they  may 
be  interested,  as  this  gives  the  salesmen  an  excellent  idea 
of  the  condition  of  their  customers'  accounts  and  imposes 
upon  them  an  added  sense  of  responsibility  in  promoting 
the  practice  of  prompt  payments  among  customers. 

There  is  much  that  may  be  said  as  to  the  advantages 
and  disadvantages  of  these  different  methods  for  "  watch- 
ing accounts."  While  the  labor  of  keeping  credit  reference 
and  collection  cards  is  considerable,  this  work  can  be  done 
by  subordinates,  and  the  necessary  tabulations  need  not 
impose  any  labor  upon  the  credit  man.  After  this  tabula- 
tion has  been  made  and  the  cards  are  ready  for  his  inspec- 
tion at  all  times,  he  can  consult  them  with  greater  ease 
than  he  could  refer  to  the  ledger.  For  instance,  the  tickler 
may  be  kept  on  his  desk,  and  he  is  not  distracted  by  hav- 
ing to  leave  his  own  office  and  go  to  the  Accounting  Depart- 
ment. When  we  appreciate  that  the  credit  man  is  a  very 
busy  person,  the  question  of  time  and  labor  saving  is  an 
important  one.  The  credit  man  who  understands  how  to 
economize  his  time  and  labor  can  devote  more  atten- 
tion to  the  thoughtful  work  pertaining  to  his  duties  and 
the  mechanical  portions  need  not  give  him  much  concern. 
In  addition,  if  a  credit  man  desires  to  look  over  the  ledger 
in  the  daytime,  he  disturbs  the  bookkeeper  and  this  makes 
for  delay,  probably  occasioning  night  work,  which  should 


COLLECTIONS  269 

be  avoided.  There  are  times  for  work  and  for  rest,  and 
the  credit  man  who  does  not  find  it  necessary  to  carry  his 
labor  into  the  time  that  should  be  devoted  to  rest  is  usually 
the  man  who  is  in  the  best  physical  and  mental  condition 
and  the  best  able  to  discharge  his  duties. 

UNFAVORABLE    DEVELOPMENTS— THEIR    EFFECTS  UPON 
FURTHER  CREDIT 

A  credit  man  on  being  asked  to  what  influence  he 
attributed  the  large  percentage  of  losses  from  bad  debts 
replied : 

"In  my  judgment,  losses  do  not  arise  from  opening  the  wrong 
kind  of  accounts  nor  from  the  want  of  skill  in  closing  them,  but 
principally  in  the  handling  of  accounts  while  they  are  alive." 

This  opinion  certainly  explains  the  causes  of  many 
losses.  During  the  pendency  of  an  account  the  credit  man 
should  be  on  the  alert  to  detect  any  unfavorable  conditions 
that  may  arise ;  and  if  there  be  no  good  reasons  for  imme- 
diate interference  with  the  debtor,  he  should  at  least  insist 
upon  prompt  payment  at  maturity.  Too  frequently,  in 
the  face  of  unfavorable  circumstances,  the  credit  man  hesi- 
tates to  take  action  because  the  account  has  still  some  time 
to  run,  and  awaits  the  due  date  in  the  hope  that  payment 
may  be  made  and  the  necessity  for  attempting  to  enforce 
it  obviated.  It  is  upon  this  rock  that  many  credits  are 
shipwrecked. 

Tardiness  in  settlements  is  always  a  danger  signal.  A 
credit  man  may  learn  before  an  account  falls  due  that  the 
debtor  has  become  slow  in  his  pa^Tuents  with  others.  Due 
recognition  should  be  given  to  this  fact  the  same  as  though 
it  were  the  credit  man's  own  account  which  was  lagging. 


270  CREDIT  AND   ITS  USES 

Tardiness  in  making  payments  is  the  most  common  symp- 
tom of  financial  weakness,  and  business  collapses  are 
invariably  preceded  by  slowness  in  making  payments.  Dil- 
atory payments  arise  from  many  causes — business  depres- 
sions, extravagance,  too  large  expenses,  overstocking,  poor 
business  methods,  unwise  investments  in  outside  enter- 
prises, or  sickness  and  death  in  the  immediate  family  of 
the  merchant.  These  are  among  the  principal  causes. 
When  payments  are  tardy  the  credit  man  should  imme- 
diately investigate  the  causes.  He  may  find  that  they  have 
arisen  from  conditions  that  were  entirely  beyond  the  con- 
trol of  the  merchant;  or  that  the  merchant  is  directly  re- 
sponsible for  them.  The  credit  man  must  determine  what 
has  occasioned  delays  in  pa3Tnents,  otherwise  he  will  be 
at  a  distinct  disadvantage,  as  it  is  obvious  he  cannot  ex- 
tend intelligent  management  to  an  account  unless  he  is 
reliably  informed  in  regard  to  the  actual  condition  of  the 
merchant's  affairs.  It  is  at  this  period  in  the  life  of  an 
account  that  the  credit  man  is  confronted  with  one  of  the 
most  delicate  and  trying  problems  in  credit  economy.  He 
must  decide  whether  to  insist  upon  a  settlement  necessitat- 
ing, in  all  probability,  the  adoption  of  radical  measures, 
thus  attracting  the  attention  of  other  creditors  who  will 
in  turn  take  similar  action  with  the  possibility  of  forcing 
the  debtor  into  insolvency,  or  trust  to  circumstances. 

It  is  well  known  that  many  merchants  have  been  forced 
into  insolvency  or  liquidation,  with  great  loss  to  themselves 
and  their  creditors,  because  certain  credit  men  have  adopted 
strong  measures,  when  a  policy  of  lenity  coupled  with 
prudent  administration  by  the  creditors  would  have  main- 
tained the  estate  whole.  If  the  causes  which  have  occa- 
sioned the  merchant's  slowness  are  found  to  be  entirely 


COLLECTIONS  271 

legitimate,  and  his  liabilities  bear  such  relations  to  his 
assets  as  would  suggest  good  prospects  for  recovery,  an  ex- 
tension of  time  may  be  conceded  with  a  fair  degree  of 
safety.  It  is  well  understood  that  too  large  a  measure  of 
indulgence  on  the  part  of  creditors  is  very  often  the  basis 
of  imposition  by  debtors,  who  divert  the  graciousness  of 
their  creditors  into  a  means  whereby  they  may  make 
preparations  for  failures  at  such  times  as  will  best  serve 
their  own  purposes.  When  a  merchant  finds  it  necessary 
to  ask  the  consideration  of  his  creditors  on  accounts  al- 
ready owing,  the  corollary  is  that  they  must  continue  to 
furnish  him  with  goods  in  order  to  meet  the  demands  of 
his  trade  and  maintain  his  stock  in  fresh  and  salable  con- 
dition. The  word  "  must  "  as  used  may  indicate  something 
of  a  more  mandatory  character  than  is  really  intended, 
as  creditors  cannot  be  compelled  to  furnish  a  merchant 
with  goods  unless  they  feel  disposed  to  do  so;  but  they 
are  under  mandatory  influences,  for  their  failure  to  supply 
the  merchant  with  goods  will  embarrass  his  possibilities 
of  continuing  in  business  under  favorable  conditions ;  the 
fact  that  he  is  owing  so  generally  almost  inhibiting  him 
from  seeking  credit  in  new  quarters.  So  that,  while  the 
creditors  are  depending  upon  the  possibility  of  the  mer- 
chant's success  in  order  to  secure  payment  of  their  ac- 
counts, he  must  depend  upon  them  for  the  means  whereby 
he  will  be  able  to  continue  in  business. 

It  is  at  this  particular  time  that  the  elements  of  char- 
acter and  capacity  play  a  momentous  part  in  credit,  for  the 
capital  may  be  impaired  or  be  in  danger  of  imminent  im- 
pairment. The  merchant's  good  character  will  lead  him  to 
deal  honestly  with  his  creditors  and  safeguard  their  inter- 
ests so  far  as  he  may  be  able  to  do  so.     The  element  of 


272  CREDIT  AND  ITS  USES 

capacity  will  serve  him  in  developing  the  business  and 
bringing  success  out  of  what  might  have  proved  a  failure. 
Sentiment  has  much  to  do  with  directing  the  judgment 
of  the  credit  man  in  the  same  degree  that  it  influences  the 
doings  of  men  in  every  department  of  life.  Although 
many  brave  attempts  are  made  to  prove  that  in  these  days 
sentiment  is  an  immaterial  quantity  in  business  affairs, 
the  fact  remains  that  probably  nowhere  does  sentiment 
prevail  to  a  greater  extent  than  in  credit  work.  When 
a  merchant  has  patronized  a  house  for  many  years,  bought 
from  it  a  large  portion  of  his  goods,  paid  promptly,  and 
ostensibly  held  the  house  in  high  esteem,  it  is  difficult  to 
eliminate  the  influence  of  sentiment  when  the  house 
finds  it  is  called  upon  to  bear  with  that  merchant  because 
his  business  has  taken  a  backward  turn.  Some  men  are  so 
constituted  that  they  can  disregard  the  favors  of  a  life- 
time and  the  obligations  that  are  supposed  to  follow  such 
favors,  but  these  men  represent  a  very  small  number. 
Except  where  a  house  controls  a  specialized  article,  busi- 
ness is  to  a  great  extent  a  matter  of  favor  which  a  mer- 
chant extends  according  to  his  personal  preferences,  either 
for  the  salesman  or  the  proprietor  of  a  concern.  AVhcn 
such  a  merchant  becomes  slow  in  his  payments  the  credit 
man  is  supposed  to  display  that  Spartan  impartiality  that 
knows  no  friendly  ties.  While  he  may  consider  that  from 
a  material  point  of  view  it  would  be  better  for  him  to 
assume  this  attitude,  it  is  still  true  that  there  are  only  a 
few  credit  men  who  can  bring  themselves  to  occupy  it. 
It  is  a  question  of  either  bearing  with  the  merchant  or 
cutting  him  entirely  aloof  and  adopting  such  means  for 
the  collection  of  his  account  as  the  most  cold-blooded  and 
sordid  considerations  would  suggest    Mr.  Fred.  A.  Smith, 


COLLECTIONS  273 

the  credit  man  of  the  well-known  house  of  Reid,  Murdoch 
&  Co.,  of  Chicago,  recently  wrote  a  paper  on  this  very  topic, 
entitled  "  When  to  Let  Go  of  an  Old  Customer."  He 
says  on  this  point: 

"The  question  then  naturally  arises,  How  should  such  cases  be 
treated?  I  beUeve  the  simplest  way  is  to  avoid  them  by  watching 
all  delinquent  accounts  more  closely,  renewing  information  more 
frequently  on  old  customers  that  are  inclined  to  be  slow,  secure 
cooperative  experience  of  others  selling  the  same  party,  either 
direct  or  through  a  clearing-house  sj^stem,  and  if  found  that  other 
creditors  are  having  a  similar  experience,  it  is  high  time  to  demand 
an  exact  showing  of  actual  conditions,  either  by  a  '  heart  to  heart ' 
personal  inter\aew  or  securing  a  property  statement  by  correspond- 
ence, and  draw  your  conclusions  as  if  a  new  account  was  being 
opened,  barring  all  sentiment. 

"If  the  customer  cannot  be  shown  in  a  kindly  manner  that 
his  boat  is  nearing  the  rocks,  both  time  and  money  will  be  wasted 
by  all  concerned  in  encouraging  further  extensions  or  increasing  the 
indebtedness.  Such  an  account  should  be  gi-adually  closed,  re- 
taining the  friendship  of  the  customer  if  possible.  At  such  times, 
however,  every  conscientious  credit  man  should  rise  above  the  sordid 
question  of  dollars  and  cents,  and  realize  that  to  a  certain  extent 
the  debtor's  entire  future  is  at  stake  and  may  rest  entirely  in  his 
hands,  or  depend  on  the  advice  given  or  action  taken  at  such  crucial 
periods.  No  mistake  should  be  made,  as  the  future  interests  and 
welfare  of  not  only  the  debtor,  but  his  family  as  well,  are  involved, 
and  a  false  move  may  result  in  a  hfe  failure  or  perhaps  a  tragedy 
that  might  have  been  avoided  by  the  right  word  or  good  advice 
from  a  creditor.  This  confirms  my  former  statement  that  closely 
watching  the  business  pulse  of  the  customer,  as  shown  by  his  ledger 
accoimt,  may  prevent  the  disease  advancing  to  a  serious  stage,  and 
by  showing  the  man  the  cause  of  his  troubles  bring  about  a  change 
of  methods — the  same  as  a  good  physician  will  use  every  means  to 
effect  a  cure  before  resorting  to  heroic  methods  of  surgery.  Oc- 
casionally a  man  shown  his  weakness  by  a  stranger  with  whom  he 
tries  to  open  an  account  will  reahze  that  his  old  friends  were  correct 
in  giving  the  same  advice,  to  which  he  had  taken  exception." 


274  CREDIT  AND   ITS  USES 

Mr.  Smith's  views  are  in  line  with  the  Best  thought 
among  credit  men  on  this  subject,  when  he  advises  that 
such  accounts  be  carefully  watched  and  information  re- 
specting them  re^^sed  so  that  the  credit  man  may  take 
advantage  of  any  facts  brought  to  light  in  these  investi- 
gations. Personal  contact  and  interviews  with  the  cus- 
toiner  so  circumstanced  will  be  a  great  aid  to  the  credit 
man  in  determining  upon  the  best  course  to  pursue.  In 
addition  to  all  this,  as  Mr.  Smith  well  says,  the  customer's 
entire  future  and  the  welfare  of  himself  and  his  family 
may  possibly  depend  upon  the  judgment  displayed  by 
credit  men  in  their  treatment  of  him  when  he  has  become 
dilatory  in  his  settlements.  ISTo  credit  man  would  want 
to  feel  that  through  undue  pressure  on  his  part  he  had 
been  responsible  for  the  downfall  of  a  merchant,  espe- 
cially if  by  kindliness  and  a  greater  interest  in  the  out- 
come of  the  merchant's  affairs  he  might  have  assisted 
him  to  escape  from  his  embarrassment. 

TREATMENT   OF  TARDY  ACCOUNTS 

When  accounts  are  not  paid  at  maturity,  the  credit 
man  must  resort  to  certain  means  for  inducing  payment. 
It  is  principally  to  guard  against  the  possibility  of  over- 
looking such  accounts  that  systematic  methods  have  been 
instituted.  There  is  danger,  however,  that  a  too  rigid 
application  of  certain  collection  systems  may  in  the  end 
defeat  their  own  good  purposes.  The  time  required  to 
exhaust  the  utilities  of  these  systems  may  have  brought 
the  debtor  from  the  point  where  payment  might  have 
been  secured  through  more  effectual  means,  to  where  it  is 
almost  impossible  for  him  to  make  payment  under  any  cir- 
cumstances.    For  instance,  a  credit  man  has  explained 


COLLECTIONS  275 

his  system  thus :  If  an  account  is  not  paid  within  ten  days 
from  maturity,  he  makes  a  draft  for  the  amount  payable. 
If  this  draft  is  not  paid  within  ten  days,  he  writes  a  letter ; 
if  no  response  is  received  to  this  letter  within  ten  days, 
a  second  letter  is  written;  if  within  ten  days  from  the 
mailing  of  the  second  letter  no  attention  is  paid  to  the 
account,  he  makes  a  threat  to  send  it  for  collection,  and  if 
within  ten  days  from  the  making  of  that  threat  the  claim 
is  not  paid,  it  is  then  sent  to  an  attorney.  The  writer  has 
no  intention  of  impugning  the  utility  of  this  particular  sys- 
tem as  applied  in  certain  trades.  It  may  be  entirely  effica- 
cious in  some  but  it  would  not  be  in  others,  as  the  lapse 
of  time  occurring  where  all  the  features  of  this  plan  were 
followed  might  negative  the  possibility  of  making  a  col- 
lection. 

Unless  given  judicious  assistance,  debtors  are  more 
inclined  to  go  from  bad  to  worse  than  from  bad  to  better, 
and  while  it  is  freely  conceded  that  credit  men,  especially 
in  these  days,  must  employ  systematized  methods  (the 
large  number  of  accounts  they  handle  necessitating  this 
if  other  good  reasons  did  not),  we  are  brought  back  to  the 
idea  underlying  all  credits  and  all  collections,  viz.,  that 
every  account  should  be  judged  on  its  merits,  whether  at 
the  time  it  is  opened,  during  the  time  it  is  running,  or 
when  due.  Machine  methods,  while  they  may  suffice  for 
small  accounts,  are  not  adequate  as  a  governing  force  for 
accounts  generally.  All  trades  seem  to  differ  in  their 
habit  of  treating  collections;  the  habits  and  standing  of 
men  differing  so  radically,  uniform  treatment  of  them  is 
out  of  the  question. 

In  certain  trades  it  is  the  custom  to  immediately  make 
a  draft  on  a  person  if  he  does  not  pay  his  account,  and 


276  CREDIT  AND   ITS   USES 

advices  to  this  effect  are  printed  on  the  statements  of  the 
account  when  rendered.  Some  merchants  care  so  little 
whether  or  not  drafts  are  made  upon  them  that  they  pur- 
posely delay  paying  their  accounts,  knowing  that  a  draft 
will  he  made,  and  they  thus  get  the  advantage  of  the  addi- 
tional time.  Creditors  attempt  to  overcome  this  practice  by 
charging  interest  on  the  account  for  the  excess  time;  but 
they  are  not  always  successful  in  collecting  it.  As  a  gen- 
eral rule,  the  debtor  gets  the  advantage,  and  this  petty 
imposition  (as  well  as  many  other  similar  impositions  on 
creditors)  will  obtain  until  business  men  insist  upon  cer- 
tain regulations  being  respected  by  those  to  whom  they 
sell.  The  thirst  for  business,  however,  leads  houses  to 
countenance  these  unfair  practices,  and  the  creditors  are 
largely  to  blame  for  their  prevalence. 

In  some  trades,  when  an  account  is  not  paid  at  ma- 
turity, the  credit  man  writes  to  the  customer,  requesting 
an  explanation  for  the  omission  and  asking  that  a  settle- 
ment accompany  the  reply.  The  credit  man  in  his  letter- 
writing  may  either  do  much  to  induce  quick  payment,  or 
offend  and  antagonize  the  debtor.  A  credit  man  of  long 
experience  has  remarked 

" ,  .  .  that  dignity  and  businesslike  methods  in  corre- 
spondence are  appreciated  as  fully  by  a  delinquent  debtor  as  by 
anyone  else." 

If  a  debtor  will  not  make  a  satisfactory  reply  to  a 
letter,  especially  one  that  merits  proper  attention,  there 
is  little  reason  to  suppose  that  he  will  pay  a  draft  except 
on  the  presumption  that  some  merchants  do  not  like  to 
have  drafts  made  upon  them.  The  draft  system  has  been 
developed  to  such  an  extent  that  in  many  trades  the  old 


COLLECTIONS  277 

disinclination  of  debtors  to  have  drafts  made  on  tliem  has 
largely  disappeared.  The  sting  has  been  taken  out  of  the 
process,  so  that  why  the  making  of  a  draft  should  be  the 
next  step  per  se  is  not  entirely  clear.  The  credit  man 
possibly  thinks  that  the  making  of  a  draft  may  afford  him 
further  and  more  satisfactory  evidence  of  the  debtor's 
unwillingness  to  pay,  and  thereby  suggest  such  further 
action  as  may  be  necessary;  again,  there  is  always  the 
Jiope  that  the  making  of  a  draft  may  produce  payment. 
The  system  employed  by  one  of  the  most  representative 
dry  goods  concerns  of  the  Middle  West  is  to  mail  a  state- 
ment of  an  account  when  it  is  due,  and  if  within  ten  days 
from  the  time  that  the  statement  is  mailed  no  response 
is  received,  to  send  a  lithographed  letter,  which  reads  as 
follows : 

"Is  there  any  misunderstanding  relative  to  the  amount  now 
due  upon  your  account,  according  to  the  statement  mailed  to  you 
about  ten  days  ago? 

"Kindly  let  us  hear  from  you  at  your  earliest  convenience. 
Very  truly  yours." 

If  no  reply  be  made  to  this  letter  and  the  amount  be  a 
small  one  (less  than  $500),  a  draft  is  then  made  for  it.  If 
neither  payment  nor  a  satisfactory  explanation  be  forth- 
coming, one  of  the  regular  adjusters  from  the  credit  office 
calls  upon  the  customer,  although  when  the  accounts  are 
small  they  are  sent  to  an  attorney.  The  credit  man  of 
this  concern  has  said  to  the  writer: 

"We  find  by  having  our  own  representative  investigate  the 
case  upon  the  ground,  discoveries  are  often  made  which  are  most 
valuable,  and  if  the  customer  is  responsible  but  careless,  the  account 
is  not  lost  by  a  procedure  of  this  kind,  considering  that  we  only 
employ  diplomatic  adjusters  who  do  not  publish  their  business  iu 
the  town  where  the  merchant  resides." 
Id 


278  CREDIT  AND   ITS   USES 

This  method  seems  to  more  nearly  approximate  a  broad 
and  judicious  treatment  of  accounts  than  a  recourse  to 
stereotyped  letters,  drafts,  or  collection  letters,  especially 
as  the  system  brings  about  an  early  and  practical  investi- 
gation of  the  customer's  affairs.  This  is  not  possible  under 
systems  that  consist  solely  in  letters,  drafts,  or  collection 
forms,  as  the  loss  of  time  incident  to  the  use  of  these 
methods  is  considerable  and  therefore  an  element  of 
danger, 

COLLECTIONS  THROUGH   DRAFTS— DRAFT  SYSTEMS 

The  practice  of  making  drafts  upon  customers  for 
overdue  accounts  is  quite  an  old  one.  Except  where  it  is 
ft  regular  feature  of  collections  and  tacitly  agreed  to  by 
debtors,  the  sending  of  a  draft  is  accepted  as  an  indication 
of  the  creditor's  desire  to  insist  upon  payment  forth\vith, 
and  sometimes  as  an  unfriendly  action.  The  limit  of  in- 
dulgence permitted  before  a  draft  is  made  depends  to  a 
great  extent  upon  the  views  of  the  credit  man  as  to  how 
much  extra  time  should  be  allowed.  Some  credit  depart- 
ments are  perfectly  willing  to  wait  for  ten  days  after  mail- 
ing a  statement  before  making  a  draft,  while  others  send  a 
draft  if  an  account  is  not  paid  by  return  mail;  others 
allow  from  three  to  five  days,  but  there  is  no  established 
rule.  For  the  collection  of  small  accounts  the  draft  sys- 
tem undoubtedly  has  its  advantages,  and  because  of  these 
advantages  the  collection  agencies  some  years  ago  devised 
methods  by  which  drafts  could  be  utilized  to  collect  claims 
from  delinquent  debtors.  The  collection  agencies  pre- 
pared these  drafts,  to  which  were  attached  stubs  directing 
that  in  the  event  of  non-pajTnent  the  banks  delivering 
the  drafts  hand  them  to  the  attorneys  named  in  the  stubs. 


CX)LLECTIONS  279 

The  debtor  could  thus  see  that  his  refusal  to  honor  the 
draft  would  bring  him  face  to  face  with  the  unpleasant 
alternative  of  inviting  an  attorney's  attention  to  his 
affairs,  a  contingency  which  men  prefer  to  avoid. 

The  draft  system  in  its  original  form — i.  e.,  as  unre- 
lated to  the  work  of  collection  agencies — has  had  a  very 
thorough  test,  and  many  believe  that  its  results  are  ex- 
cellent. The  making  of  drafts  has  also  developed  a  point 
of  difference  between  banks  and  credit  men.  The  latter 
hold  that  banks  should  be  willing  to  give  the  most  careful 
attention  to  the  handling  of  drafts,  irrespective  of  the 
possibilities  of  making  collections;  also  that  the  banks 
should  be  satisfied  with  the  slight  collection  charges  they 
deduct  when  drafts  are  collected.  The  recompense  for 
handling  the  larger  nimaber  of  drafts  that  are  not  paid 
has  not  been  made  clear,  except  by  some  credit  men,  who, 
taking  a  broader  view  of  this  subject,  inclose  a  remit- 
tance of  ten  or  fifteen  cents  with  each  draft,  so  that  no 
matter  whether  it  be  paid  or  not,  the  bank  has  received 
some  compensation  for  its  trouble.  Credit  men  who  fol- 
low this  practice  state  that  they  have  no  difficulty  in 
making  such  collections  through  banks,  and  that  the 
drafts  they  send  forward  in  this  way  are  given  courteous 
and  efficient  attention. 

The  collection-agency  draft  system  also  has  many  ad- 
vocates among  credit  men  who  consider  that  it  is  an  effica- 
cious method  of  handling  dubious  accounts.  There  are 
others  quite  as  positive  in  their  condemnation  of  the  plan, 
asserting  that  systems  which  provide  for  handing  an  ac- 
count to  an  attorney  in  the  event  that  the  draft  is  not 
paid  do  more  harm  to  the  merchant  than  if  the  account 
had  been  sent  to  an  attorney  in  the  first  place.     There  is 


280  CREDIT  AND  ITS  USES 

merit  in  this  adverse  criticism.  When  a  credit  man  uses 
one  of  these  collection-agency  drafts,  he  is  calling  the 
attention  of  the  bank  to  the  fact  that  he  regards  the 
account  as  being  in  such  condition  that  if  the  draft  be 
not  paid  it  should  be  given  to  an  attorney.  Giving  an 
account  to  an  attorney  is  the  last  step,  and  the  conse- 
quence may  be  an  injury  to  the  reputation  of  the  debtor. 
It  may  be  contended  that  when  a  man  will  not  pay  he  is 
not  entitled  to  any  consideration,  and  that  there  is  no  rea- 
son why  he  should  be  protected  from  such  knowledge  becom- 
ing public.  The  creditor's  ability  to  collect  an  account 
may  depend  upon  the  knowledge  of  the  debtor's  unsatis- 
factory condition  not  being  a  matter  of  publicity.  The 
moment  it  becomes  such,  the  attention  of  all  creditors  is 
invited,  with  consequences  to  which  we  have  already  called 
attention,  viz.,  forcing  the  debtor  into  insolvency;  so  that 
for  his  own  sake  the  creditor  should  abstain  from  doing 
anything  that  would  adversely  affect  the  possibility  of 
payment  being  secured.  The  draft  systems  employed  by 
collection  agencies  prove  attractive  to  credit  men  because 
there  is  little  expense  attached  to  them.  Some  agencies 
charge  a  regular  subscription  price,  and  as  a  part  consid- 
eration furnish  the  creditor  with  books  or  pads  of  drafts 
which  he  can  use  whenever  he  desires.  In  other  cases  the 
drafts  are  sent  through  the  collection  agency,  and  the 
charge  is  a  very  moderate  one. 


CHAPTER   XVn 

COLLECTIONS — Concluded 

(B)  Collection  Letters — Attorneys-at-Law  as  Collectors — 
Adjustment  Bureaus  or  Administration  by  Creditors 
— Suspended  Accounts 

COLLECTION  LETTERS 

FArLUEE  to  pay  an  account  when  a  draft  is  made  is 
usually  an  indication  that  a  debtor's  delinquency  is  of 
a  pronounced  character,  and  it  is  then  deemed  advis- 
able to  adopt  some  course  that  will  prove  more  effective. 
Some  houses  prefer  to  make  several  drafts,  for  the  reason 
that  the  expense  entailed  is  trifling,  but  an  unpaid  ac- 
count always  reaches  a  stage  in  which  the  draft  is  in- 
effective and  some  different  method  must  be  employed. 
With  many  concerns  this  method  consists  of  sending  what 
is  called  a  "  collection  letter."  This  is  a  printed  form 
containing  spaces  for  entries  of  the  name  and  address  of 
the  debtor,  the  amount  of  the  claim  and  such  other  data 
as  it  is  not  possible  to  include  in  the  perfunctory  printed 
matter.  The  collection  letter  is  an  outgrowth  of  systems 
devised  by  collection  agencies,  and  is  a  distinct  method  of 
enforcing  collections,  especially  in  cases  where  the  debtor 
is  a  confirmed  delinquent.  These  collection  letters  usu- 
ally consist  of  a  series  of  communications,  the  first  being 

281 


282  CREDIT  AND  ITS  USES 

a  temperate  notification  that  payment  is  expected;  if  no 
adjustment  of  the  claim  results  from  the  sending  of  this 
letter,  one  couched  in  firmer  language  is  then  forwarded. 
If  the  debtor  still  prove  recalcitrant,  an  even  stronger 
communication  is  sent,  stating  that  it  is  the  final  attempt 
to  collect  the  claim  in  an  amicable  way  and  that  recourse 
to  legal  proceedings  will  be  the  next  step. 

A  short  time  ago  some  enterprising  collection  concerns 
conceived  the  idea  of  preparing  series  of  collection  letters 
on  the  order  described,  accompanied  by  envelopes  bearing 
the  name  of  the  agency,  and  selling  them  in  lots  to  those 
engaged  in  giving  credit,  who  would  dispatch  them  to 
delinquent  debtors;  the  impression  made  upon  the  mind 
of  the  debtor  was  that  the  communication  had  come  to 
him  direct  from  the  collection  agency.  This  practice  is 
now  a  general  one,  and  there  are  a  number  of  concerns 
whose  principal  business  it  is  to  prepare  and  dispose  of 
these  so-called  "  collection  letters."  Prior,  however,  to 
the  institution  of  this  practice,  many  trade  organizations 
conducted  adjustment  and  collection  bureaus,  and  em- 
ployed collection  letters  with  excellent  results.  The  great 
advantage  of  this  method  was  the  little  labor  and  expense 
involved.  Collection  letters  are  used  at  the  present  time 
by  many  trade  organizations  in  collecting  accounts  for 
their  members,  and  also  by  certain  of  the  credit  men's 
associations  which  conduct  collection  bureaus.  One  sys- 
tem followed  requires  the  members  of  these  organizations 
who  use  the  collection  letters  to  promptly  notify  the  col- 
lection bureau;  the  bureau  takes  cognizance  of  the  prog- 
ress made  in  collecting  the  account,  and  if  collection  is 
not  effected,  steps  in  and  takes  active  charge  of  the  case. 
The  plan  followed  in  other  organizations  is  that  the  mem- 


COLLECTIONS  283 

bers  shall  notify  the  bureau  (on  a  form  provided)  that  an 
account  is  delinquent.  On  receipt  of  this  notification  the 
bureau  sends  the  debtor  a  formal  collection  letter  with 
the  request  that  a  remittance  be  forwarded  direct  to  the 
creditor.  If  payment  is  received  the  creditor  immediately 
advises  the  bureau.  If  a  settlement  is  not  made  within  a 
reasonable  time,  the  bureau  is  notified  to  that  effect  and 
the  officer  in  charge  forwards  a  second  or  third  letter, 
as  the  requirement  may  be. 

The  sale  of  collection  letters  has  been  carried  on  to 
a  large  extent,  and  the  forms  are  in  use  by  many  credit 
offices.  Under  this  system  the  collection  concern,  which 
is  very  often  represented  by  a  name  only,  is  entirely  di- 
vorced from  any  responsibility  in  the  matter  after  it  has 
sold  the  forms  to  the  creditor.  The  debtor  who  receives 
one  of  these  letters  or  an  entire  series  of  them  from  a  credi- 
tor, believes  that  the  collection  agency  whose  name  ap- 
pears has  charge  of  the  account.  He  infers  that  the 
creditor  has  adopted  outside  means  for  enforcing  the 
collection,  and  this  usually  marks  an  entire  severance 
of  business  relations  after  the  account  is  collected.  It 
is  inconceivable  that  a  house  would  continue  to  do  busi- 
ness with  a  man  who  had  become  so  delinquent  as  .o  Jail 
for  the  use  of  a  collection  letter  unless  his  business  affairs 
underwent  so  material  an  improvement  as  to  dissipate  the 
possibility  of  a  recurrence  of  the  former  unfavorable 
conditions. 

The  propriety  of  this  plan,  however,  is  open  to  serious 
question,  and  the  fact  that  it  is  so  regarded  is  proved  by 
the  statements  of  prominent  credit  men  that  they  would 
not  think  of  sending  such  letters  to  anyone  but  undesirable 
people.      Others  hold  that  the   use   of  collection   blanks 


284  CREDIT  AND  ITS  USES 

is  only  justified  when  a  credit  man  has  determined  to 
close  an  accoimt,  as  he  would  not  care  to  adopt  such 
means  with  a  person  whose  patronage  he  desired  to  re- 
tain. There  is  a  sharp  division  of  sentiment  among 
credit  men  as  to  the  efficacy  of  collection  letters  under 
any  circumstances,  some  believing  that  they  are  very 
effective,  while  others  maintain  that  the  exact  contrary  is 
the  case. 

The  practice  of  using  these  collection  letters  has  grown 
to  such  an  extent  that  very  reputable  business  and  trade 
organizations  have  adopted  forms  and  sell  them  to  their 
members.  The  names  of  these  organizations  appear  on 
the  letters,  and  are  used  to  force  debtors  to  make  payments 
of  accounts,  in  the  fear  that  their  failure  to  make  pay- 
ment will  bring  down  upon  them  the  unfavorable  action 
of  these  organizations,  whose  memberships  will  be  in- 
formed of  their  delinquency.  In  cases  where  collection 
letters  convey  this  threat  and  the  organizations  using  them 
carry  it  into  execution,  the  system  is  entirely  warrantable 
and  everything  may  be  said  in  its  favor,  providing  that 
its  utilities  are  not  exercised  to  wring  from  a  debtor  pay- 
ment of  an  amount  that  he  should  not  be  called  upon  to 
pay.  Many  trade  organizations  and  some  of  the  affiliated 
branches  of  the  l^ational  Association  of  Credit  Men  pub- 
lish monthly  or  semimonthly  bulletins  containing  the 
names  of  the  delinquent  debtors  reported  to  them. 

ATTORNEYS  AS  COLLECTORS 

When  creditors  find  it  impossible  to  collect  claims 
through  statements,  regular  correspondence,  adjusters, 
drafts,  and  collection  letters,  the  next  and  practically  only 
recourse  is  to  the  services  of  an  attorney.     TkTiile  it  is 


COLLECTIONS  285 

customary  for  some  credit  departments  to  act  witli  more 
celerity  than  others  in  handing  accounts  to  an  attorney, 
he  is  generally  regarded  as  the  very  last  resource  in  an 
effort  to  collect;  in  fact,  credit  men  admit  that  they  ex- 
haust every  other  known  means  before  enlisting  the  serv- 
ices of  an  attorney.  When  an  attorney  receives  a  claim 
he  must  employ  either  one  of  two  methods  of  procedure: 
first,  to  collect  in  installments,  or  second,  to  bring  suit 
for  the  claim.  He  may  in  some  cases  secure  a  collection 
immediately  or  upon  his  first  demand,  but  in  most  in- 
stances he  has  to  collect  the  claim  in  installments,  and 
is  perfectly  willing  to  bring  about  a  settlement  in  that 
way.  The  creditor  is  agreeable  to  such  a  settlement,  pro- 
viding it  involves  the  payment  of  the  entire  amount 
owing,  preferring  to  suffer  the  disadvantages  of  the  delay 
with  the  reasonable  assurance  of  getting  full  payment, 
rather  than  incur  the  possibility  of  bringing  about  the 
financial  collapse  of  the  debtor  through  suit.  ISTo  matter 
which  method  he  follows,  there  is  always  publicity,  for 
the  fact  that  the  attorney  or  his  representative  is  calling 
frequently  upon  the  debtor  to  make  collections,  or  the 
debtor  calling  upon  the  attorney  to  make  his  payments, 
becomes  a  matter  of  gossip  in  the  neighborhood,  gi-eatly 
to  the  injury  of  the  debtor's  credit. 

Among  the  objections  to  placing  claims  with  attorneys 
is  the  expense  involved.  The  attorney  is  entitled  to  a 
fee  for  his  services,  and  this  invariably  has  to  be  paid  by 
the  creditor  in  the  form  of  a  commission  upon  the  amount 
collected.  This,  as  well  as  paying  costs  and  fees  incident 
to  a  suit,  means  a  loss  to  the  creditor.  Franklin  says  in 
"  The  Way  to  Wealth,"  "  It  is  foolish  to  pay  out  money 
in  a  purchase  of  repentance,"  and  many  creditors  believe 


286  CREDIT  AND  ITS  USES 

that  money  spent  to  further  the  collection  of  bad  debts  is 
foolishly  spent. 

In  the  attempt  to  collect  claims  through  attorneys  a 
great  deal  depends  upon  the  character  of  the  attorneys; 
that  is  to  say,  the  results  that  are  expected  will  be  de- 
pendent upon  the  character  and  capacity  of  the  attorney. 
His  capacity  as  a  lawyer  will  enable  him  to  exercise  good 
judgment  in  handling  the  claim,  which  is  practically  han- 
dling the  debtor;  and  his  good  character  will  be  a  safe- 
guard to  the  interest  of  the  creditor  in  assuring  a  prompt 
and  satisfactory  accounting  for  any  money  that  comes 
into  his  possession.  It  is  therefore  important  that  credit 
departments  should  be  reliably  informed  as  to  the  stand- 
ing of  these  attorneys.  It  is  not  an  easy  matter  to  deter- 
mine what  an  attorney's  standing  may  be,  although  the 
creditor  class  has  been  helped  in  this  respect  through  the 
publication  of  attorneys'  lists,  the  names  in  which  are 
vouched  for  by  the  concerns  selling  the  lists.  As  a  fur- 
ther evidence  of  their  confidence  in  the  attorneys,  many 
of  the  concerns  publishing  law  lists  offer  with  the  sub- 
scription a  guarantee  for  any  moneys  collected  by  the 
attorneys.  These  lists  are  known  as  "  bonded  lists  "  or 
"  bonded  attorneys."  In  some  cases  a  house  using  such 
a  list  is  at  perfect  liberty  to  forward  claims  directly  to 
the  attorneys  whose  names  are  given,  notifying  the  pub- 
lishing company,  however,  as  to  the  sending  of  each  claim. 
The  notification  to  the  publishing  company  is  a  necessary 
precaution,  otherwise  it  would  never  be  in  a  position  to 
know  to  what  extent  its  gitarantee  was  being  called  upon. 
In  other  cases,  however,  concerns  publishing  lists  do  not 
extend  a  guarantee  on  the  attorneys  unless  the  claim  be 
forwarded  through  the  oflSce  of  the  publishing  company. 


COLLECTIONS  287 

While  conceding  the  representative  character  of  cer- 
tain law  lists,  some  credit  departments  prefer  to  have  their 
own  lists  of  attorneys,  and  this  is  notably  the  case  with 
large  concerns.  For  instance,  Mr.  Fred.  E.  French,  of 
the  Credit  Department  of  Messrs.  J.  V.  Farwell  Co.,  of 
Chicago,  was  asked  by  the  writer  what  means  he  employed 
for  sending  claims  for  collection  and  replied: 

"For  a  number  of  years  past,  we  have  had  a  regular  list  of 
attorneys,  altogether  numbering  possibly  1,000,  and  in  compiling 
this  list  we  make  a  particular  effort  to  not  only  obtain  ability,  but 
honesty,  in  consequence  of  which  we  have  not  lost  anything  in  over 
five  years  through  dishonest  representatives.  We  investigate  the 
standing  of  our  attorneys  the  same  as  we  do  that  of  a  customer, 
and  after  being  satisfied  that  they  will  fulfill  our  requirements, 
we  mail  to  them  a  list  of  the  accounts  which  we  are  selling  in 
their  immediate  neighborhood." 

Such  a  list  as  that  described  by  Mr.  French  is  a  very  valu- 
able asset  of  a  credit  department.  It  is  especially  so 
where  a  house  employs  a  corps  of  adjusters,  as  these  ad- 
justers know  to  what  lawyers  they  must  go  for  advice, 
and  are  therefore  never  at  a  loss  to  avail  themselves  of 
legal  services  whenever  necessary. 

A  great  mass  of  the  collections  forwarded  from  dif- 
ferent points  are  sent  through  collection  agencies,  and 
opinion  among  credit  men  is  divided  as  to  whether  it  is 
best  to  forward  claims  through  collection  agencies  or 
direct  to  an  attorney.  Much  depends  upon  the  character 
and  size  of  the  claim.  Small  claims  are  sent  either  di- 
rectly to  attorneys  or  through  collection  agencies  without 
hesitation.  When  the  claim  is  a  large  one,  and  the  ques- 
tions involved  of  a  delicate  character,  the  services  of  a 
competent  adjuster  or  the  personal  counsel  of  the  house 


288  CREDIT  AND  ITS   USES 

will  in  all  probability  prove  more  acceptable;  some  credit 
men  of  long  experience  assert  that  in  the  collection  of 
large  claims,  they  prefer  to  send  their  own  personal  coun- 
sel rather  than  to  forward  the  claim  to  a  local  attorney. 
This  course  is  preferable  when  a  house  has  no  regular 
correspondent  at  the  point  where  the  claim  arises,  and 
niust  depend  upon  a  law  list  or  other  avenue  of  informa- 
tion for  a  recommendation  of  the  attorney  to  whom  the 
claim  should  be  sent.  When  a  house  sends  its  own  coun- 
sel, it  knows  exactly  to  whose  hands  the  business  is  in- 
trusted, and  therefore  must  feel  safer  as  to  the  outcome, 
although  it  does  not  follow  that  the  ability  of  the  per- 
sonal counsel  is  any  better  than  that  of  the  local  man  who 
might  be  selected.  One  of  the  supposed  advantages  of 
sending  claims  to  collection  agencies  is  that  it  means  a 
great  saving  of  labor  to  the  credit  man.  The  collection 
agency  is  expected  to  follow  the  claim  step  by  step,  to  be 
thoroughly  informed  of  all  developments  in  regard  to  it, 
and  to  see  that  the  attorney  to  whom  the  claim  is  sent 
does  his  full  duty.  It  does  not  follow  that  the  credit  man 
is  relieved  from  all  attention  to  the  matter,  further  than 
inquiring  from  time  to  time  as  to  the  state  of  the  case. 
A  credit  man  who  assumes  to  give  the  collection  of  bad 
debts  the  attention  it  deserves  will  be  anxious  to  know  as 
much  about  the  progress  of  the  claim  as  the  collection 
agency  itself;  he  must  be  constantly  informed  in  regard 
to  it,  and  also  compile  the  data  respecting  the  claim  and 
keep  it  in  shape  for  reference.  This  involves  considerable 
correspondence,  and  if  he  must  go  through  all  this  corre- 
spondence with  the  collection  agency,  why  could  he  not 
carry  on  the  correspondence  just  as  effectually  with  the 
lawyer  to  whom  he  might  send  the  claim  directly?    It  may 


COLLECTIONS  289 

be  said  in  answer  to  this  that  the  credit  man,  although 
a  very  competent  person,  may  not  understand  the  special 
advice  that  should  be  given  from  time  to  time  in  order 
to  assist  in  the  collection  of  the  claim ;  or  may  not  be  in- 
formed as  to  the  many  methods  that  expert  collectors  would 
employ,  it  being  assumed  that  those  in  charge  of  the  col- 
lection agency  have  all  the  expert  knowledge  and  acquire- 
ments in  a  very  marked  degree.  This  may  be  true  of 
some  collection  agencies;  it  certainly  is  not  true  of  all 
of  them. 

Now,  it  is  admitted  that  a  collection  agency  is  in  a 
position  to  give  an  attorney  a  large  amount  of  business, 
while  an  individual  house  may  give  him  only  a  small  num- 
ber of  claims  every  year.  At  the  same  time,  if  many 
houses  were  to  retain  this  same  attorney,  the  aggregate 
of  their  business  would  be  considerable.  In  addition  to 
this,  when  a  claim  is  sent  to  an  attorney  directly,  he  com- 
mands the  entire  fee  and  is  not  called  upon  to  divide  with 
a  collection  agency.  However,  it  is  this  very  question 
of  fees  that  affects  most  largely,  for  where  a  great  deal 
of  business  is  sent  to  an  attorney  through  a  collection 
agency,  he  makes  more  in  the  gross,  although  his  single 
fee  is  smaller  than  upon  claims  sent  to  him  directly.  It 
must  also  be  admitted  that  a  collection  agency,  in  doing 
a  large  amount  of  business  in  a  certain  territory,  as  sug- 
gested, is  in  a  better  position  to  judge  of  an  attorney's 
qualifications  than  a  creditor  who  sent  claims  directly. 
The  creditor  very  rarely  has  the  time  or  inclination  to 
make  an  extended  investigation  of  the  attorney's  standing 
unless  this  question  be  given  the  studious  attention  ad- 
vanced in  the  opinion  of  Mr.  French,  The  view  as  to  the 
agency  being  in  a  position  to  furnish  the  creditor  with  pro- 


290  CREDIT  AND  ITS  USES 

tection  against  defalcations  of  attorneys  is  a  sound  one, 
although  it  has  been  explained  that  there  are  many  reliable 
law  lists  which  are  guaranteed  in  this  respect,  and  conse- 
quently firms  that  send  their  claims  directly  to  these  law- 
yers are  guaranteed  just  as  fully  as  though  they  forwarded 
the  claim  through  a  collection  agency  carrying  a  bonded 
list.  No  doubt  this  question  is  very  often  determined  by 
the  personal  predilections  of  the  credit  man.  Some  credit 
men  prefer  to  handle  claims  through  their  own  attorneys, 
as  they  feel  that  they  are  informed  more  promptly  as  to 
progress  than  if  they  had  to  wait  for  reports  from  a  col- 
lection agency. 

ADJUSTMENT    BUREAUS    OR    ADMINISTRATION    BY 
CREDITORS 

Under  the  State  system  for  the  administration  of  in- 
solvent estates  every  incentive  was  offered  to  creditors  to 
act  independently  in  attempting  to  establish  the  prece- 
dence of  their  claims.  The  National  Bankruptcy  Act 
having  superseded  the  State  system,  and  the  spirit  of  that 
law  making  for  equality,  creditors  are  becoming  educated 
to  the  principle  that  cooperation  of  interests  is  a  useful 
force  in  administering  the  estates  of  insolvents.  The  re- 
sult has  been  the  establishment  of  adjustment  bureaus  by 
business  organizations,  a  movement  which  has  developed 
considerable  strength  among  the  credit  men's  associa- 
tions. This  is  a  splendid  augury  for  the  existence  of  better 
relations  among  business  men,  redounding  to  the  benefit 
of  both  creditors  and  debtors. 

When  a  debtor  finds  that  he  cannot  continue  pay- 
ment and  that  the  liquidation  of  his  business  would  show 
a  loss,  he  should  assure  his  creditors  of  his  willingness  to 


COLLECTIONS  291 

place  the  business  in  their  hands  and  abide  by  their  deci- 
sion. The  debtor  who  approaches  his  creditors  in  this  spirit 
invariably  finds  that  they  will  receive  him  in  an  open 
and  generous  manner.  A  conference  will  then  take  place, 
and  a  plan  devised  for  conducting  the  business  or  adopting 
any  other  measures  which  the  peculiar  conditions  involved 
nay  suggest  as  being  the  wisest. 

The  bankruptcy  act  aims  to  reach  this  result;  but  it 
is  also  true  that  creditors  can  accomplish  the  same  end 
with  less  expense  than  would  be  attended  by  the  admin- 
istration of  an  estate  under  the  bankruptcy  act,  and  vastly 
less  than  under  the  State  laws.  If  a  debtor  considers  that 
he  is  likely  to  receive  liberal  treatment  from  his  creditors, 
he  will  be  more  willing  to  put  his  affairs  in  their  hands. 
The  greater  the  prevalence  of  this  policy  and  this  spirit, 
the  greater  will  be  the  willingness  of  debtors  to  confide  in 
their  creditors  and  the  less  loss  there  will  be  from  failed 
estates. 

The  inevitable  result  of  this  line  of  action  is  a  satis- 
factory settlement  for  the  creditors  and  a  return  of  some- 
thing at  least  to  the  debtor.  The  adjustment  of  crippled 
estates  under  the  direction  of  creditors  is  not  a  new  de- 
parture, although  it  is  now  receiving  more  attention  than 
ever  before  in  the  history  of  this  country.  There  have  been 
merchants'  protective  associations  in  existence  for  many 
years,  some  of  them  as  old  as  twenty-five  and  thirty  years, 
and  older,  and  they  have  served  a  good  and  noble  purpose. 

One  of  the  special  functions  of  the  IsTational  Bank- 
ruptcy Act  is  the  adjustment  of  estates  through  composi- 
tions; but  compositions  can  be  effected  just  as  admirably 
through  organizations  of  business  men.  In  some  cases  of 
insolvent  estates  the  business  is  conducted  under  the  direc- 


292  CREDIT  AND  ITS  USES 

tion  of  creditors  or  trustees  appointed  by  them,  until  a 
certain  amount  has  been  realized,  and  the  business  is  then 
transferred  to  the  debtor.  Or,  if  the  condition  of  the  busi- 
ness warrants,  a  composition  may  be  entered  into  involving 
a  deferrence  of  the  payment  of  the  amount  stipulated  over 
a  specified  time,  during  which  the  business  will  remain, 
at  least  nominally,  in  charge  of  the  creditors  or  some  one 
acting  for  them. 

Any  system  for  the  administration  of  insolvent  estates 
which  involves  concert  rather  than  division  of  action  among 
creditors  is  of  manifest  superiority.  The  commercial, 
trade  and  credit  associations  of  the  country  can  revolu- 
tionize the  influences  and  practices  which  have  heretofore 
obtained  in  the  winding  up  of  insolvent  estates.  They  can 
make  the  process  one  of  great  benefit  to  themselves,  while 
it  will  also  have  the  effect  of  maintaining  in  business  many 
unfortunate  men  who  under  the  old  systems  would  have 
been  forced  to  retire  permanently.  The  establishment  of 
adjustment  bureaus  under  the  auspices  of  the  credit  men's 
associations  is  a  healthful  and  pleasing  development. 

SUSPENDED  ACCOUNTS 

When  a  debtor  has  failed  or  his  account  has  been  given 
to  an  attorney  for  collection,  or  there  is  any  reason  to 
question  its  worth,  its  character  has  assumed  such  an 
aspect  as  to  require  that  it  be  placed  in  a  class  with  others 
of  a  similar  nature.  These  accounts  are  knowTi  as  "  sus- 
pended accounts,"  deriving  this  name  from  the  fact  that 
it  is  customary  to  suspend  action,  either  as  to  charging 
them  to  profit  and  loss  or  such  other  course  as  may  be  neces- 
sary until  developments  warrant  some  definite  policy  being 
pursued.    When  an  account  is  sent  to  a  lawyer  for  coUec- 


COLLECTIONS  293 

tion,  or  other  extreme  measures  adopted,  it  is  evident  that 
its  value  as  an  asset  has  been  impaired.  There  is  no  good 
reason,  therefore,  why  such  an  account  should  be  retained 
upon  the  general  ledger  of  a  concern  and  reckoned  at  its 
face  value,  so  that  it  is  customary  in  well-conducted  busi- 
ness establishments  to  either  charge  such  an  account  imme- 
diately to  profit  and  loss  or  place  it  in  a  suspense  account. 
The  reasons  for  this  are  obvious.  Xo  upright  firm  desires 
to  deceive  itself  or  its  creditors  as  to  the  value  of  the  ac- 
counts due  to  it.  The  only  safe  way  to  avoid  such  accounts 
being  included  among  the  good  accounts  and  face-value 
assets  is  to  see  that  they  are  segregated,  where  their  char- 
acter will  not  be  misunderstood  and  their  approximate 
value,  only,  computed. 

Suspended  accounts  belong  to  a  separate  branch  of 
credit-ofiice  work,  and  special  treatment  should  be  accorded 
to  them.  In  order  that  this  treatment  shall  be  efficient, 
it  is  necessary  to  adopt  the  same  systematic  methods  for 
their  government  as  in  the  case  of  live  accounts.  Card 
systems  may  be  utilized  to  excellent  advantage  in  treating 
suspended  accounts.  It  is  the  practice  of  many  credit 
men  to  use  card  systems  for  tabulating  data  respecting 
these  accounts  and  directing  their  management  in  an  or- 
derly way.  The  correspondence  incidental  to  suspended 
accounts  in  time  becomes  voluminous,  and  a  folder  system 
on  the  same  general  order  as  that  employed  for  docketing 
credit  information  may  be  used.  In  this  way  there  would 
be  no  appreciable  danger  of  the  credit  man  overlooking 
such  work  as  is  necessary  in  regard  to  suspended  accounts. 
It  is  true  that  many  firms  hold  it  almost  a  waste  of  time  to 
pay  much  attention  to  this  class  of  accounts,  for,  as  a  gen- 
eral rule,  there  is  little  realized  from  them.  It  is  partly 
20 


294  CREDIT  AND  ITS  USES 

because  of  the  inadequate  attention  given  that  so  little  has 
been  realized  from  them.  Credit  offices  that  give  conscien- 
tious thought  and  effort  to  the  maniiDulation  of  suspended 
accounts  know  that  they  have  realized  very  much  more 
than  would  have  been  possible  if  the  debtors  had  been  al- 
lowed to  go  their  way  unthought  of  and  unmolested. 

Another  reason  why  every  bad  or  doubtful  account 
should  be  investigated  is  that  the  information  acquired 
will  assist  the  credit  office  in  deciding  upon  the  wisdom 
of  reopening  the  account  if  in  after  years  the  same  person 
should  appl}'  for  credit.  A  man  may  make  what  can  with 
perfect  propriety  be  called  an  honorable  failure.  If  he 
rehabilitates  himself  and  asks  for  credit,  the  records  show 
that  he  emerged  from  the  failure  with  an  unstained  char- 
acter; also  that  the  reasons  for  his  failure  may  not  have 
been  such  as  to  cast  serious  doubt  upon  his  capacity  to 
conduct  a  business  successfully  if  the  circumstances  were 
different  from  those  under  which  he  had  formerly  operated. 
These  facts  are  of  the  greatest  value  to  the  credit  man,  and 
of  benefit  to  the  merchant.  But  if  a  man's  former  failure 
or  business  record  indicated  a  lack  of  moral  stamina,  this 
is  an  important  thing  for  the  credit  man  to  know.  He 
would  be  without  this  knowledge  if  failures  and  bad  debts 
were  not  thoroughly  investigated,  and  the  results  of  the 
investigations  preserved  in  the  files  of  the  credit  office. 


PART  FIVE 
GENERAL  QUESTIONS 


CHAPTER    XVIII 

LEGAL,    EEDEESS THE    BANKRUPTCY    ACT 

The  theory  upon  which  legal  redress  for  unpaid  or 
failed  accounts  is  sought,  is  based  upon  the  presumption 
that  there  has  been  a  violation  of  contract.  There  is  prob- 
ably no  element  affecting  the  development  and  welfare  of 
the  human  race  that  has  exercised  a  more  potent  influence 
than  the  element  of  contract;  it  is  clothed  with  a  tradi- 
tionary power,  the  import  of  which  cannot  be  overesti- 
mated. Prof.  Henry  Sumner  Maine  attests  the  antiquity 
and  universality  of  contract  when  he  says  in  his  work  on 
"  Ancient  Law  " : 

"Neither  ancient  law  nor  any  other  source  of  evidence  discloses 
to  us  society  entirely  destitute  of  the  conception  of  contract." 

A  sale  is  one  of  the  commonest  forms  of  contract  known 
to  the  human  family.  When  a  merchant  is  unable  to  col- 
lect the  amount  of  a  sale,  he  appeals  to  the  law.  Society, 
having  from  time  immemorial  recognized  the  certainty  of 
mercantile  disputes  and  misadventures,  adopted  laws  under 
which  the  rights  and  interests  of  creditors  and  debtors 
would  be  safeguarded  and  protected  from  the  predaceous 
encroachments  of  members  of  either  element  upon  the 
other.  But  an  orderly  dispensation  of  justice  required 
that  all  laws  be   administered  by   those   competent   and 

297 


298  CREDIT  AND  ITS  USES 

trusted,  and  consequently  courts  were  instituted  for  the 
solution  of  questions  requiring  the  sanction  of  judicial  in- 
terpretation. 

The  merchant  proceeds  on  the  principle  that  he  is  en- 
titled to  some  compensation  for  the  damages  sustained 
througli  the  dehtor's  violation  of  the  contract,  and  this  sat- 
isfaction it  is  his  right  to  attempt  to  secure.  The  character 
of  redress  may  be  determined  in  many  different  ways,  ac- 
cording to  the  legal  customs  of  the  nation  or  state  to  whose 
laws  he  makes  appeal.  During  the  greater  part  of  our  life 
as  a  nation,  legal  complications  between  creditors  and  debt- 
ors were  settled  by  recourse  to  State  laws,  unless  an  ade- 
quate compromise  was  offered.  The  creditor  often  pre- 
ferred to  secure  a  judgment  against  the  debtor  and  hold  it 
until  such  time  as  the  debtor  might  come  into  possession  of 
sufficient  property  to  enable  the  creditor  to  proceed  against 
such  property  by  virtue  of  his  judgment;  although  this 
course  was  impossible,  so  far  as  resident  creditors  were  con- 
cerned, where  an  estate  was  administered  under  an  insol- 
vency law. 

The  best-known  forms  of  law  under  which  the  relations 
of  creditors  and  debtors  have  been  adjusted  in  English  and 
American  jurisprudence  are  bankrupt  laws,  insolvency 
laws,  and  the  common-law  assignment.  The  disposition 
of  all  nations,  however,  has  been  toward  the  adoption  of 
bankruptcy  laws,  under  which  legal  redress  is  now  gen- 
erally sought  where  the  interests  of  the  creditor  have  been 
damaged  through  the  debtor's  failure  to  make  paj-ment. 
The  developments  of  bankruptcy  legislation  have  wrought 
in  that  system  some  astonishing  changes.  Where  the  first 
bankrupt  laws  presupposed  guilty  action  or  fraudulent  in- 
tention on  the  part  of  insolvent  debtors,  the  principles  upon 


LEGAL  REDRESS— THE  BANKRUPTCY  ACT         299 

which  these  laws  are  now  based  do  not  primarily  concern 
themselves  with  fraudulent  practices.  The  present  laws 
relate  to  an  equitable  distribution  of  the  assets  of  an  estate 
among  all  the  creditors,  and  the  debtor's  discharge  from 
his  liabilities,  provided  he  has  not  been  guilty  of  miscon- 
duct, so  that  he  may  again  embark  in  business  life  un- 
trammeled  by  a  burden  of  debts. 

Bankruptcy  laws  are  of  mediaeval  origin.  They  were 
first  introduced  in  some  of  the  Italian  States,  and  later 
adopted  in  France  and  England.  It  is  now  generally  con- 
ceded that  bankruptcy  laws  are  an  outgrowth  of  the  com- 
mercial system,  their  development  from  the  very  earliest 
stages  being  prompted  by  the  requirements  of  commerce. 
In  this  country  they  have  been  recognized  as  a  necessity  of 
the  commercial  system.  (See  "  Bankruptcy  a  Commercial 
liegulation,"  by  James  M.  Olmstead,  of  Boston,  Harvard 
Law  Review,  vol.  xxv,  Xo.  10.)  The  first  English  bank- 
ruptcy law  was  passed  in  1542  during  the  reign  of 
Henry  VIII  (34-35  Henry  VIII,  C  4).  Since  that  time 
England  has  had  some  thirty-eight  bankruptcy  statutes 
(including  amendatory  laws),  the  last  having  been  passed 
in  1883,  but  undergoing  material  amendment  in  1890. 
In  England,  as  in  this  country,  bankruptcy  law  has  had 
its  friends  and  always  some  very  powerful  opponents.  The 
principles  of  English  bankruptcy  law  have  been  used  as 
the  basis  of  similar  statutes  adopted  by  other  nations,  one 
of  their  strongest  features  being  the  composition  provision, 
which  has  been  also  written  into  our  present  law.  Bank- 
ruptcy laws  are  in  force  in  all  the  great  nations  of  Europe, 
and  their  adoption  has  been  coincident  with  the  marked 
commercial  expansion  of  those  nations. 

Bankruptcy  legislation  in  the  United  States  is  based 


300  CREDIT  AND  ITS  USES 

upon  the  authority  conferred  upon  Congress  in  the  Con- 
stitution, which  says  that  "  Congress  shall  have  power  to 
establish  .  .  .  uniform  laws  on  the  subject  of  bankrupt- 
cies throughout  the  United  States."  This  power  is  one 
that  the  Congress  may  exercise  or  disregard  at  its  dis- 
cretion. Its  relation  to  the  credit  system  is  set  forth  in 
no  uncertain  way  in  a  report  of  the  Judiciary  Committee 
of  the  House  of  Representatives,  dated  July  21,  1841,  as 
follows : 

"Credits,  or  demands,  are  property  in  which,  not  infrequently, 
the  bulk  of  large  individual  estates  consist.  As  property,  they  are 
under  the  protection  of  the  law  as  much  as  any  other  kind  of  prop- 
erty. All  the  rights  of  property  attach  to  them ;  the  right  of  pro- 
tection and  defense  against  all  encroachment  and  injury,  and  the 
right  of  recovery  when  wrongfully  taken  away  or  withheld.  They 
are  private  property,  and  private  property  is  sacred.  It  must  be 
respected ;  and  the  law  must  be  vigilant  and  efficient  in  its  guardian- 
ship of  it.  Failure  in  this  is  failure  in  the  highest  duty  of  civil 
society,  and  tends  directly  to  dissolution." 

On  three  occasions  (1800,  1841,  1867)  prior  to  the 
passage  of  the  present  act  Congress  enacted  bankruptcy 
legislation.  The  very  short  life  of  the  first  two  laws  and 
the  limited  existence  of  tlie  third  offered  little  basis  for  the 
development  of  a  thorough  appreciation  of  the  precepts  of 
bankruptcy  legislation  such  as  the  needs  of  this  commer- 
cial people  really  required,  and  also  gave  rise  to  much 
misconception  as  to  the  duty  of  Congress  in  respect  to  this 
legislation. 

The  absence  of  bankruptcy  laws  committed  the  admin- 
istration of  debts  to  the  bankruptcy  and  insolvency  systems 
adopted  by  the  different  States;  for  while  such  State 
statutes  are  suspended  by  the  existence  of  a  National  Bank- 


LEGAL  REDRESS— THE  BANKRUPTCY  ACT         301 

ruptcy  Act,  in  the  absence  of  a  national  law  the  State  laws 
are  in  full  force,  or, 

"The  States  may  legislate  on  the  subject  of  bankruptcy  if  there 
be  no  law  of  Congress  which  will  conflict." — (Cooley,  "  Constitutional 
Limitations.") 

The  phraseology  of  the  Constitution  on  this  subject  has 
given  rise  to  much  dispute  as  to  the  real  intent  of  the 
framers  of  the  Constitution  in  conferring  upon  Congress 
the  power  to  adopt  uniform  laws  on  the  subject  of  bank- 
ruptcies. 

"Just  what  the  Federal  Government  meant  by  laws  on  the  sub- 
ject of  bankruptcies,  has  been  disputed.  The  commonly  received 
view  is  that  an  insolvent  person,  or  one  unable  to  pay  his  debts,  is 
a  bankrupt,  and  that  a  law  dividing  his  property  proportionally 
among  his  creditors  and  discharging  him  from  legal  obligation  to 
make  further  payment,  is  a  bankrupt  law."  (Hinsdale,  "American 
Government.") 

Some  strict  constructionists  have  held  that  the  permis- 
sive clause  in  the  Constitution  relating  to  these  laws  was 
only  intended  to  refer  to  hankrupts,  applying  the  word  to 
traders,  as  under  the  old  English  laws.  The  general  inter- 
pretation and  the  now  accepted  one,  however,  is  that  it 
was  the  intention  of  the  framers  of  the  Constitution  to 
confer  upon  Congress  authority  to  legislate  upon  all  the 
questions  of  every  character  and  description  concerning 
business  collapses,  and  including  voluntary  and  involuntary 
bankruptcy. 

The  first  bankruptcy  law  of  the  United  States  was 
the  Act  of  April  4,  1800,  the  operation  of  which  was  lim- 
ited to  five  years.    The  new  Federal  Government  had  been 


302  CREDIT  AND  ITS  USES 

in  existence  eleven  years  before  Congress  availed  itself  of 
its  constitutional  right  to  pass  a  bankruptcy  law.  One  of 
the  reasons  assigned  for  the  enactment  of  this  law  was  the 
distress  caused  by  the  depredations  inflicted  by  England 
upon  our  merchant  marine,  and  the  feeling  gained  cur- 
rency that  where  general  business  distress  existed  the 
chances  of  adequate  relief,  so  far  as  the  creditor  class  was 
concerned,  would  be  best  subserved  through  the  operations 
of  a  national  statute.  This  bankruptcy  act  was  based 
almost  entirely  upon  the  English  law  of  that  period  and 
was  limited  to  traders  only,  its  benefits  being  withheld 
from  those  not  engaged  in  business  pursuits,  meaning  me- 
chanics, farmers,  professional  men,  clerks,  etc.  The  only 
exemptions  permitted  under  this  act  were  necessary  wear- 
ing apparel,  bedding  for  the  bankrupt  and  his  family,  and 
bread  money.  In  order  that  a  bankrupt  might  not  be 
thrown  upon  the  world  entirely  penniless,  with  the  pos- 
sibility of  himself  and  his  family  becoming  public  charges, 
a  provision  based  on  the  old  "  bread-money  "  principle  of 
the  English  law  was  inserted  in  the  act.  Under  this,  a 
bankrupt  who  had  complied  with  all  the  requirements  of 
the  law  was  to  be  paid  five  per  cent  on  the  "  net  produce  " 
of  the  estate,  providing  that  it  realized  a  dividend  of  fifty 
per  cent  for  the  creditors ;  this  commission  of  five  per  cent 
not  to  exceed  in  the  gToss  the  sum  of  $500.  In  case  the 
estate  was  sufficient  to  pay  the  creditors  seventy-five  per 
cent,  the  bankrupt  was  allowed  ten  per  cent,  this  commis- 
sion, however,  not  to  exceed  the  sum  of  $800.  It  being  the 
first  attempt  at  bankruptcy  legislation,  it  is  not  surprising 
that  the  law  did  not  prove  satisfactory.  The  pressure 
brought  to  bear  upon  Congress  for  its  repeal  was  very 
strong,  and  a  repeal  bill  was  passed  December  19,  1803, 


LEGAL  REDRESS— THE  BANKRUPTCY  ACT         303 

so  that  the  first  bankruptcy  act  was  not  permitted  to  live 
its  allotted  life. 

Although  the  first  bankruptcy  legislation  had  not 
proved  satisfactory,  either  to  its  friends  or  to  the  country 
at  large,  shortly  after  the  close  of  the  second  war  with 
England  there  again  arose  a  demand  for  the  passage  of 
a  national  statute  on  bankruptcy.  This  sentiment,  how- 
ever, did  not  crystallize  into  any  powerful  form  until  sub- 
sequent to  the  panic  of  1837.  The  general  impoverish- 
ment of  the  people,  largely  due  to  speculation,  created  a 
very  considerable  debtor  class,  which  impressed  its  strength 
upon  one  of  the  political  parties  of  the  period,  so  that  it 
might  be  said  the  law  passed  August  19,  1841,  was  adopted 
in  response  to  a  demand  of  the  debtors  of  the  nation.  As 
might  have  been  expected,  there  was  introduced  for  the 
first  time  in  American  bankruptcy  law  a  provision  permit- 
ting voluntary  bankruptcy,  open  to  all  persons  whether 
traders  or  nontraders.  The  law  was  based  very  largely 
upon  the  Massachusetts  Insolvency  Law  of  1838,  with  the 
introduction  of  certain  changes  suggested  by  the  devel- 
opments of  the  legislation  in  England.  Under  this  act, 
the  exemptions  extended  to  personal  property  only  to  the 
amount  of  $300.  The  law  excited  the  disfavor  of  the 
creditors  of  the  country,  one  of  the  principal  grounds 
of  objection  being  that  opposition  to  a  discharge,  to  be 
effective,  had  to  be  made  by  a  majority  in  number  and 
amount  of  the  creditors  proving  debts.  It  should  bo  said, 
however,  that  the  law  aimed  to  prevent  frequent  dis- 
charges in  bankruptcy,  for  there  was  a  provision  to  the 
effect  that  a  man  could  not  secure  a  second  discharge  un- 
less he  paid  seventy-five  per  cent  of  all  proved  claims; 
and  in  this  respect,  at  least,  the  law  of  1841  was  decidedly 


304  CREDIT  AND  ITS  USES 

in  advance  of  later  legislation  on  this  subject  in  the 
United  States. 

Another  feature  of  the  law  of  1841  was  the  fact  that 
appeals  could  not  go  beyond  the  circuit  courts.  This  was 
not  a  wise  provision,  especially  in  the  incipiency  of  bank- 
ruptcy legislation,  for  the  inability  to  carry  questions  to 
the  Supreme  Court  of  the  United  States  would  naturally 
have  a  tendency  to  narrow  the  limits  of  interpretation  to 
be  placed  upon  the  law. 

The  next  effort  of  any  moment  to  secure  bankruptcy 
legislation  in  the  United  States  commenced  in  1861,  but 
this  movement  did  not  assume  significance  until  1864, 
when  a  determined  effort  was  made  by  Congressman 
Thomas  A.  Jenckes,  of  Rhode  Island,  who  was  the  special 
champion  of  bankruptcy  legislation  in  Congress,  to  secure 
the  passage  of  a  law.  It  required,  however,  three  years  of 
almost  unremitting  effort  to  bring  about  the  adoption  of 
the  Act  of  March  2,  1867.  This  law  was  a  much  more 
thorough  statute  than  either  of  its  predecessors.  The  ad- 
ministration of  the  law  was  committed  to  registers  and 
assignees,  the  relative  powers  and  duties  of  whose  offices 
corresponded  with  those  of  the  referees  and  trustees  under 
the  present  act.  A  wholesome  provision  of  the  law  of  1867 
required  that  a  voluntary  bankrupt  must  owe  debts  in  ex- 
cess of  $300,  thus  preventing  a  great  number  of  applica- 
tions for  relief  in  bankruptcy  by  those  who  owed  small 
amounts,  representing  debts  incurred  through  purchases 
for  the  necessaries  of  life.  Under  this  law  appeals  to  the 
Supreme  Court  of  the  United  States  were  barred  unless 
the  matter  in  dispute  exceeded  $2,000.  The  exemptions 
under  the  Act  of  1867  extended  to  such  personal  property 
as  household  goods  and  wearing  apparel  and  equipment 


LEGAL  REDRESS— THE  BANKRUPTCY  ACT         305 

used  In  the  service  of  the  United  States,  a  provision  due  to 
the  fact  that  the  country  had  just  passed  through  the  great 
Civil  War.  There  was  introduced  into  the  law  of  1867 
(for  the  first  time)  a  provision  exempting  property  which 
would  be  exempt  under  the  laws  of  the  State  of  which  the 
bankrupt  was  a  resident,  or  had  his  domicile  at  the  time  of 
the  commencement  of  the  proceedings  in  bankruptcy. 

The  "  acts  of  bankruptcy  "  under  the  law  of  1867  did 
not  differ  in  any  essential  respect  from  those  of  the  pre- 
vious laws,  a  condition  of  insolvency  being  understood  to 
apply  to  a  person  who  had  defaulted  in  his  commercial 
payments.  This  provision  presented  many  complications, 
especially  during  the  years  of  panic  following  "  Black 
Friday,"  and  so  serious  did  this  question  become  that 
the  law  was  amended  (Act  of  June  22,  1874)  so  that 
an  involuntary  petition  did  not  lie  unless  made  at  the  in- 
stance of  creditors  representing  one-fourth  in  number  and 
one-third  of  the  aggregate  of  provable  debts.  This  change, 
designed  to  assist  those  who  might  be  temporarily  embar- 
rassed, and  also  to  make  the  law  more  flexible,  was  one 
of  the  principal  reasons  for  its  undoing,  for  under  the 
amendment  it  was  most  difficult  to  have  a  person  adjudi- 
cated a  bankrupt,  and  the  debtor  class  was  not  slow  to 
grasp  the  advantages  which  this  situation  gave  them.  In 
addition  to  this,  the  expenses  of  administration  were  be- 
lieved by  the  creditors  to  be  excessive,  and  although  an 
effort  was  made  at  some  reform  in  this  direction,  through 
the  amendments  of  1874,  the  disapproval  which  the  law 
had  excited  became  so  pronounced  as  to  lead  to  its  repeal 
June  7,  1878.  There  were  ten  amendatory  bills  passed 
changing  the  Act  of  March  2,  1867. 

That  bankruptcy  legislation  had  not  taken  a  permanent 


306  CREDIT  AND  ITS  USES 

hold  upon  the  favor  of  the  people  is  evidenced  by  the  fol- 
lowing  opinion  of  so  excellent  an  authority  as  Judge 
Lowell,  who  during  the  pendency  of  the  Act  of  1867  made 
this  reference  to  it : 

"  Whether  or  not  the  bankrupt  law  will  take  ita  place  as  part  of 
the  settled  policy  of  the  country  cannot  be  easily  predicted.  It  ia 
not  likely  to  be  displaced  until  the  existing  commercial  depression 
has  been  relieved.  After  that  time  much  will  depend  upon  the 
degree  of  care  and  economy  with  which  it  is  administered,  and  the 
readiness  of  Congress  to  adopt  modifications  that  shall  be  found  to 
be  necessary,  but  most  upon  the  opinion  that  the  debtors  of  the 
country  may  entertain  of  its  operation." 

It  would  now  be  well  to  consider  certain  reasons  why, 
up  to  the  time  of  the  repeal  of  the  Act  of  1867,  bankruptcy 
legislation  had  not  come  to  be  regarded  as  a  necessary  ele- 
ment of  our  jurisprudence.  From  the  adoption  of  the 
Constitution  there  had  existed  two  powerful  political  ele- 
ments, known  as  Federalists  and  Anti-Federalists.  Feder- 
alism represented  that  type  of  statesmanship  and  its  follow- 
ing which  believed  in  a  strong  centralized  government,  and 
was  wedded  to  the  theory  that  the  best  interests  of  the 
Union  required  the  exercise  of  the  Federal  power  in  every 
respect  where  it  could  be  constitutionally  applied.  On  the 
other  hand,  anti-federalism  seemed  to  regard  the  Union 
as  simply  a  vehicle  for  the  dispensation  of  certain  author- 
ity, but  was  predisposed  to  hold  within  the  States  the  larg- 
est measure  of  autonomy  and,  where  constitutional  inter- 
pretation was  necessary,  to  limit  as  far  as  could  possibly 
be  done  the  scope  of  the  Federal  compact.  Later  these  ele- 
ments came  to  represent  the  extremely  divergent  views 
held  by  the  Whigs  on  one  side  and  the  States'  Rights  peo- 
ple on  the  other.    The  States'  Rights  interests  had  always 


LEGAL  REDRESS— THE  BANKRUPTCY  ACT         307 

viewed  with  marked  jealousy  the  slightest  curtailment  of 
the  prerogatives  of  the  States,  although  Senator  Hayne,  of 
South  Carolina,  one  of  the  most  distinguished  States' 
Rights  leaders  of  his  day,  believed  that  a  national  bank- 
ruptcy law  was  preferable  to  the  many  State  laws  affecting 
debts. 

It  was  decided  by  the  Supreme  Court,  in  Sturgis  vs. 
Crowninshield  (the  court  speaking  through  Chief  Justice 
John  Marshall),  that  "  since  the  adoption  of  the  Consti- 
tution of  the  United  States,  a  State  has  authority  to  pass 
a  bankrupt  law,  provided  such  law  does  not  impair  the  obli- 
gation of  contracts,  and  provided,  further,  that  there  be  no 
Act  of  Congress  in  force  to  establish  a  uniform  system  of 
bankruptcy  conflicting  with  such  laws,"  This  was  the 
strongest  incentive  to  the  States'  Rights  people  to  uphold 
and  extend  the  power  and  authority  of  the  States  in  respect 
to  the  administration  of  debts,  by  preventing  the  passage  of 
a  national  bankruptcy  law. 

The  fact  of  State  laws  being  in  operation  conferred 
upon  State  courts  the  administration  of  failed  estates. 
Xo  matter  what  might  be  the  character  of  the  State  law, 
there  was  vested  in  the  State  courts  the  authority  to  dis- 
pense a  large  amount  of  patronage.  The  question  of 
official  and  judicial  patronage  has  affected  and  always 
will  affect  the  popularity  or  unpopularity  of  certain  meas- 
ures of  government.  Where  the  power  to  dispense  this 
patronage  is  transferred  to  the  United  States  courts 
through  the  operation  of  a  national  bankruptcy  law,  and 
the  State  courts  thereby  deprived  of  it,  jealousies  are 
bound  to  arise,  for  it  not  infrequently  happens  that  this 
transfer  may  result  in  giving  the  patronage  to  an  entirely 
different  political  element  from  that  which  may  be  in  con- 


308  CREDIT  AND  ITS  USES 

trol  of  the  governmental  and  judicial  power  of  the  State. 
This  linking  of  the  judicial  power  with  the  political  power 
is  not  intended  as  a  reflection  upon  the  uprightness  or  pu- 
rity of  purpose  of  the  judiciary,  but  it  is  an  undeniable  fact 
that  under  our  political  system  of  selecting  judges,  they 
are  in  honor  bound  to  dispense  court  patronage  among  the 
members  of  that  party  to  whom  they  owe  the  favor  of  their 
nominations  or  appointments.  Xot  only  is  the  political 
power  that  this  patronage  confers  involved,  but  there  is 
also  the  extremely  important  question  of  the  emoluments 
that  flow.  It  is,  therefore,  evident  why  certain  political 
elements  should  very  much  prefer  a  system  for  the  admin- 
istration of  debts  that  leaves  all  these  powers  and  emolu- 
ments within  the  control  of  the  States  and  not  as  a  part  of 
the  national  judicial  machinery. 

Further,  there  has  always  existed  among  the  people 
an  element  strongly  opposed  to  extending  the  authority 
of  the  United  States  courts,  and  the  root  of  this  objection 
is  one  that  does  no  dishonor  to  those  holding  it,  for  it  is 
the  old  differentiation  between  Federalism  on  one  side 
and  the  States'  Rights  cult  upon  the  other.  It  may  be  said 
for  the  latter  that  many  of  its  followers  honestly  believe 
that  the  liberties  of  the  people  will  be  best  nurtured  by 
the  States  holding  a  strong  balance  of  power,  and  by  keep- 
ing the  power  to  govern  as  near  to  the  people  as  possible. 
Under  our  political  system  it  is  the  theory  that  as  a  mu- 
nicipal government  was  closer  to  the  people  than  a  State 
government,  so,  naturally,  was  a  State  government  closer 
to  the  people  than  the  national  Government. 

There  has  also  existed  another  ground  of  objection  to 
bankruptcy  laws.  It  is  the  theory  that  when  a  man  goes 
through  bankruptcy  his  misfortunes  are  unduly  exploited 


LEGAL  REDRESS— THE  BANKRUPTCY  ACT        309 

or  made  a  matter  of  greater  publicity  than  would  be  the 
case  if  he  were  simply  to  make  an  assignment  under  a 
State  law.  There  is  some  reason  for  this.  Although  as- 
signments under  State  laws  are  usually  advertised  at  the 
time  they  are  made,  the  administration  of  an  assignment 
is  practically  a  private  one,  whereas,  under  the  Act  of 
July  1,  1898,  a  bankruptcy  case  must  be  a  matter  of  public 
record.  Indeed,  it  is  the  publicity  made  necessary  by  the 
provisions  of  the  statute  that  constitutes  a  strong  point  in 
its  favor.  The  title  "  bankrupt "  has  always  been  used  as 
an  opprobrious  one,  due  undoubtedly  to  the  fact,  as  before 
stated,  that  under  the  first  English  laws,  bankrupts  were 
supposed  to  be  persons  who  had  committed  gi*ave  offenses 
against  their  neighbors  and  the  state,  through  the  very  fact 
of  being  unable  to  pay  their  debts;  and  under  the  Con- 
tinental systems  bankrupts  were  under  certain  conditions 
treated  with  great  severity ;  in  fact,  made  to  wear  a  certain 
garb  to  advertise  their  disgrace  and  add  to  the  contumely 
of  their  situation.  jSlaturally  much  that  is  objectionable 
has  always  surrounded  the  name,  and  this  has  in  past 
years  accounted  to  some  extent  for  the  disfavor  with  which 
bankruptcy  laws  have  been  regarded,  although  De  Tocque- 
ville  remarked  on  the  strange  indulgence  shown  to  bank- 
rupts in  the  United  States. 

The  great  industrial  revival  subsequent  to  the  panic  of 
1873  marked  the  transition  from  the  formative  to  the 
constructive  period  of  the  nation's  existence,  and  it  is  be- 
yond question  that  the  most  powerful  element  in  this  great 
constructive  process  has  been  the  spread  of  commerce.  As 
the  trade  and  commerce  of  the  nation  have  expanded,  the 
usages,   political  sentiments,  and  national  aspirations  of 

the  people  have  undergone  a  stupendous  change,  and  the 
21 


310  CREDIT  AND  ITS  USES 

full  effect  of  this  change  is  manifested  in  the  stirring  de- 
mand for  everything  that  will  enhance  the  prestige  of  the 
Government  as  a  great  national  entity.  It  was  indubitable 
that  State  lines,  State  limitations,  and  the  narrowness  due 
to  certain  phases  of  State  pride  should  disappear  or  be 
ground  to  nothingness  under  the  triumphant  heel  of  the 
giant  of  nationalism. 

As  an  accompaniment  of  political  changes,  there  arose 
a  persistent  demand  for  the  adoption  of  a  new  national 
bankruptcy  law,  and  while  it  may  be  said  that  the  effort 
to  secure  such  a  law  was  commenced  almost  immediately 
after  the  repeal  of  the  law  of  1867,  it  was  not  until  the 
middle  of  the  last  decade  of  the  nineteenth  century  that 
this  movement  had  assumed  such  proportions  as  to  attract 
the  earnest  attention  of  Congress. 

Behind  this  demand  for  a  new  bankruptcy  law  there 
was  marshaled  the  great  bulk  of  the  commercial  interests 
of  the  country,  no  longer  a  secondary  influence,  but  in  the 
march  of  events  an  element  that  had  become  a  controlling 
spirit  in  affairs.  Aiding  in  this  work  for  many  years  was 
the  press  of  the  country,  which  had  always  taken  a  favor- 
able view  of  national  bankruptcy  legislation.  As  opposed 
to  the  passage  of  a  new  law,  there  were  certain  powerful 
interests  represented  by  the  bankers,  a  few  very  large  mer- 
cantile institutions,  and  the  remnant  of  the  States'  Rights 
contingent.  This  opposition  was  effectual  for  some  years, 
but  it  was  finally  borne  down,  through  the  tenacity  of  the 
friends  of  a  national  law  for  the  administration  of  debts, 
by  the  passage  of  the  National  Bankruptcy  Act  of  July  1, 
1898. 

The  present  National  Bankruptcy  Act  was  enacted 
after  a  struggle  prolonged  for  nearly  twenty  years.    As  an 


LEGAL  REDRESS— THE  BANKRUPTCY  ACT        311 

illustration  of  the  doubt  existing  in  the  House  of  Repre- 
sentatives as  to  the  wisdom  of  this  legislation,  a  motion 
to  limit  the  operations  of  the  law  to  three  years  was  only 
defeated  by  a  close  vote.  The  passage  of  the  act  was  hailed 
by  a  majority  of  the  creditors  of  the  country  as  a  progi-ess- 
ive  step  in  legislation  affecting  the  relations  of  debtor 
and  creditor.  It  w^as  not  considered,  even  by  its  friends, 
to  even  approximate  a  perfect  measure,  for  in  reality  it 
was  a  compromise  between  the  forces  favoring  a  compre- 
hensive bankruptcy  law  and  those  who  favored  a  purely 
voluntary  and  discharge  measure.  It  was  hoped,  however, 
that  the  law  would  prove  to  be  the  beginning  of  permanent 
bankruptcy  legislation. 

The  act  as  it  left  Congress  was  certainly  the  best 
thought-out  bankruptcy  legislation  that  had  ever  been 
placed  upon  the  statute  books  of  this  country.  While  the 
range  of  its  operations  may  not  be  as  extensive  as  some 
of  the  European  laws,  it  is  a  well-constructed  and  readable 
measure.  One  of  its  elements  of  superiority  is  the  ease 
:with  which  references  lo  its  different  sections  may  be 
made.  This  is  very  important  in  a  measure  so  close  to 
the  everyday  life  of  the  people,  for  unless  a  law  be  well 
phrased  and  its  different  divisions  clearly  indicated,  it  is 
not  to  be  wondered  at  if  the  people  fail  to  appreciate  its- 
character  and  scope. 

The  administration  of  the  law  of  1898  was  received  by 
its  friends  with  incomplete  satisfaction  from  the  begin- 
ning. The  all-time  opponents  of  bankruptcy  legislation, 
perceiving  the  manifest  deficiencies  of  the  statute,  promptly 
commenced  vigorous  attacks  upon  it.  They  offered  as  one 
of  their  strongest  arguments  the  dissatisfaction  of  its 
friends,  and  advanced  the  theory  that  it  was  impossible 


312  CREDIT  AND  ITO  USE8 

to  devise  an  acceptable  national  bankruptcy  law.  The  ease 
with  which  discharges  were  secured  (some  men  securing 
several  discharges  within  a  few  years)  showed  that  the 
law  was  lamentably  weak  in  this  respect,  and  that  unless 
some  effort  were  made  at  amendment,  its  repeal  was  cer- 
tain; in  fact,  so  excellent  an  authority  and  able  and  con- 
stant a  friend  of  the  bankruptcy  law  as  Mr.  William  II. 
Hotchkiss,  of  Buffalo,  said  in  an  article  published  in  the 
North  American  Review  of  April,  1901,  on  "  Two  Years 
of  the  Federal  Bankruptcy  Law  " : 

"  The  law,  then,  should  either  be  repealed  or  amended.  Already 
8ome  are  clamoring  for  repeal.  The  '  jubileeist^'  demand  it  on 
principle ;  our  mighty  crop  of  tares  having  been  garnered,  the  pur- 
pose of  the  law,  say  they,  has  been  fulfilled.  These  err  in  under- 
standing, not  motive.  The  same  cannot  be  said  of  a  less  numerous 
but  very  powerful  class  who  seek  its  repeal.  The  past  two  years 
have  witnessed  association  after  association  of  bankers  fulminating 
against  the  law.  Scarce  a  week  passes  but  the  heads  of  certain 
great  mercantile  establishments  declare  publicly  that  it  must  go. 
Even  many  lawyers  charge  a  present  decrease  in  litigation,  amount- 
ing to  a  quarter  or  a  third,  to  the  existence  of  this  statute.  The 
three  together  have  raised  such  a  clatter  that  repeal  bills  are  pending 
in  both  houses  of  Congress. 

"But,  should  the  law  be  repealed?  Not,  surely,  because  self- 
interest,  nourished  by  the  memory  of  secret  preference  and  unfair 
advantage,  rises  I'.ke  a  banshee  to  warn  the  one-time  preferred  that 
its  repeal  would  be  profitable  to  them.  Those  who  have  not  been 
able  to  command  preferences,  or  to  support  collection  bureaus,  or 
to  increase  sales  by  subsidizing  employees,  are  at  last  safeguarded 
by  the  law.  Nor  should  it  be  repealed  on  the  ground  that  it  is 
wrong  for  the  State  to  cancel  debts.  The  interests  of  the  State  are 
ever  greater  than  those  of  the  individual.  !More,  it  should  not  be 
repealed,  because,  once  repealed,  the  nation  wiU  bid  farewell  to 
all  bankruptcy  legislation  until  panic  leaps  through  the  land  and 
furnishes  an  excuse  for  another  jubilee.    Meanwhile,  the  business 


LEGAL  REDRESS— THE  BANKRUPTCY  ACT        313 

"world  would  be  back  again  where  it  was  three  years  ago,  scrambling 
for  precedence,  the  strong  crushing  the  weak." 

The  demand  for  radical  amendments  to  the  law  com- 
menced within  a  year  from  the  time  of  its  passage  and  was 
maintained  with  great  vigor.  Many  repeal  measures  and 
amendments  were  introduced  in  Congress.  The  most  im- 
portant amendments  were  those  contained  in  the  Ray  Bill, 
which  took  its  name  from  Hon.  George  W.  Ray,  chairman 
of  the  Judiciary  Committee  of  the  House  of  Representa- 
tives in  the  Fifty-seventh  and  Fifty-eighth  Congress,  after- 
Tvards  a  United  States  district  judge.  After  some  delay 
and  some  important  changes  in  the  Senate  the  Ray  Bill 
was  passed,  and  went  into  effect  February  5,  1903. 

The  bankruptcy  act  is  divided  into  seven  divisions  or 
cliapters,  viz, :  Chapter  1,  Definitions ;  Chapter  2,  Creation 
of  Courts  of  Bankruptcy  and  their  Jurisdiction ;  Chapter 
3,  Bankrupts ;  Chapter  4,  Courts  and  Procedure  Therein ; 
Chapter  5,  Officers,  Their  Duty  and  Compensation ;  Chap- 
ter 6,  Creditors ;  and  Chapter  7,  Estates.  These  chapters 
are  separated  into  many  subdivisions.  The  act  aims  to 
reach  every  contingency  of  bankruptcy  administration, 
based  on  tlie  principles  of  substantive  law.  While  many 
telieve  that  it  should  be  more  rigorous,  Congress  undoubt- 
edly pursued  the  wisest  course  in  not  adopting  a  too  drastic 
measure,  especially  as  far  as  it  might  relate  to  the  require- 
ments of  criminal  or  remedial  law. 

A  marked  departure  in  bankruptcy  legislation  appears 
in  Subdivision  15,  Section  1,  Chapter  1,  viz.,  the  defini- 
tion of  insolvency.  Under  the  Act  of  1867  and  other  sta- 
tutes, and  especially  the  Continental  statutes,  a  failure  to 
meet  one's  liabilities  as  agreed  was  an  act  of  bankruptcy. 


314  CREDIT  AND   ITS   USES 

It  appeared,  however,  to  the  framers  of  the  present  act 
that  it  would  be  better,  especially  in  view  of  our  great 
commercial  activity,  to  define  insolvency  by  a  much  nar- 
rower interpretation.     It  is  provided  that: 

"A  person  shall  be  deemed  insolvent  within  the  provisions  of 
this  act  whenever  the  aggi-egate  of  his  property,  exclusive  of  any 
property  which  he  may  have  conveyed,  transferred,  concealed,  or 
removed,  or  permitted  to  be  concealed  or  removed,  with  intent  to 
defraud,  hinder  or  delay  his  creditors,  shall  not,  at  a  fair  valuation, 
be  sufficient  in  amount  to  pay  his  debts." 

According  to  this  interpretation,  it  is  more  difficult  to  place 
a  man  in  bankruptcy  than  under  the  other  method.  The 
debtor  is  regarded  as  the  weaker  party,  and  it  was  no  doubt 
the  design  to  protect  him  from  radical  action  by  his  credi- 
tors. There  is  no  danger,  under  the  present  act,  of  a  man 
being  declared  an  involuntary  bankrupt  unless  his  condi- 
tion be  such  that  the  creditors  can  prove  beyond  doubt  that 
his  estate  is  unable  to  satisfy  the  liabilities  against  it.  As 
an  additional  protection  to  the  debtor,  the  law  provides  that 
where  an  involuntary  petition  is  filed  the  alleged  bankrupt 
shall  have  the  right  to  ask  for  a  jury  trial  to  determine  his 
solvency. 

The  act  provides  for  voluntary  and  involuntary  bank- 
ruptcy. 

"Any  person  who  owes  debts,  except  a  corporation,  shall  be 
entitled  to  the  benefits  of  the  act  as  a  volmitary  bankrupt.  Any 
natural  person,  except  a  wage-earner,  or  a  person  engaged  chiefly 
in  farming  or  the  tillage  of  the  soil,  any  unincorporated  company, 
and  any  corporation  engaged  principally  in  manufacturing,  trading, 
printing,  pubUshing,  mining,  or  mercantile  pursuits,  owing  debts 
to  the  amount  of  $1,000  or  over,  may  be  adjudged  an  involuntary 
bankrupt." 


LEGAL  REDRESS— THE  BANKRUPTCY  ACT       315 

A  feature  which  is  regarded  with  disfavor  by  the  credi- 
tor interests  is  that  which  permits  a  debtor  whose  estate 
is  administered  in  bankruptcy  to  avail  himself  of  such  ex- 
emptions as  are  allowed  in  the  State  wherein  he  has  had  his 
"  domicile  for  the  six  months  or  gi'eater  portion  thereof 
immediately  preceding  the  filing  of  the  petition."  There 
exists  as  marked  a  diversity  in  State  legislation  on  the  sub- 
ject of  exemptions  as  on  every  other  question,  and  the  un- 
fairness of  this  provision  is  manifest.  The  difference  in 
State  exemptions  has  also  been  urged  by  the  opponents  of 
a  bankruptcy  law  as  an  argument  to  prove  that  it  is  not 
a  uniform  measure,  as  it  permits  a  diversity  of  exemptions. 
As  a  constitutional  proposition,  however,  this  has  not  been 
regarded  as  a  tenable  objection,  and  consequently  has  never 
been  construed  as  affecting  the  uniformity  required  by  the 
Constitution  in  the  authority  conferred  upon  Congress  to 
legislate  on  bankruptcies. 

Among  the  best  features  of  the  act  is  one  which  per- 
mits compositions  with  creditors,  even  after  a  person  has 
been  adjudicated  a  bankrupt.  The  question  of  the  com- 
position comes  directly  before  the  court,  and  the  power  to 
make  it  enforceable  is  discretionary  with  the  judge.  If 
he  considers  that  the  composition  offered  is  to  the  best  in- 
terests of  the  estate,  he  can  order  it  made,  irrespective  of 
the  feelings  of  a  very  powerful  minority  of  the  creditors. 
This  is  an  essentially  humane  provision.  The  lodgment 
of  this  authority  in  the  judge  protects  a  well-disposed 
bankrupt  from  the  rapacity  of  creditors  who,  taking  ad- 
vantage of  his  desire  to  continue  in  business,  attempt  to 
force  from  him  one  hundred  cents  on  the  dollar.  Compo- 
sitions may  be  set  aside  by  the  judge  if  it  can  be  shown  that 
fraud  was  practiced  in  their  procurement. 


316  CREDIT  AND  ITS  USES 

One  of  the  most  important  provisions  of  the  bank- 
ruptcy law  is  the  discharge  feature.  A  bankrupt  who  has 
complied  with  all  the  requirements  of  the  statute  may  re- 
ceive a  complete  discharge  from  his  debts.  This  is  tlie 
great  boon  sought  by  those  unable  to  pay  their  obligations 
in  full.  The  grounds  of  opposition  to  a  discharge  are  as 
follows : 

"  (1)  Committed  an  offense  punishable  by  imprisonment  as 
herein  provided;  or  (2)  with  intent  to  conceal  his  financial  con- 
dition, destroyed,  concealed,  or  failed  to  keep  books  of  account  or 
records  from  which  such  condition  might  be  ascertained;  or  (3)  ob- 
tained property  on  credit  from  any  person  upon  a  materially  false 
statement  in  wTiting  made  to  such  person  for  the  purpose  of  obtain- 
ing such  property  on  credit;  or  (4)  at  any  time  subsequent  to  the 
first  day  of  the  four  months  immediately  preceding  the  filing  of 
the  petition  transferred,  removed,  destroyed,  or  concealed,  or 
permitted  to  be  removed,  destroyed,  or  concealed  any  of  his  prop- 
erty with  intent  to  hinder,  delay,  or  defraud  his  creditors;  or  (5)  in 
voluntary  proceedings  been  granted  a  discharge  in  bankruptcy  with- 
in six  years ;  or  (6)  in  the  course  of  the  proceedings  in  bankruptcy 
refused  to  obey  any  lawful  order  of  or  to  answer  any  material  ques- 
tion approved  by  the  court." 

There  are  certain  classes  of  debts  from  which  a  bank- 
rupt is  not  relieved  by  a  discharge,  and  these  are  repre- 
sented by: 

"Such  as  (1)  are  due  as  a  tax  levied  by  the  United  States,  the 
State,  county,  district,  or  municipality  in  which  he  resides;  (2)  are 
liabilities  for  obtaining  property  by  false  pretenses  or  false  repre- 
sentations, or  for  willful  and  malicious  injuries  to  the  person  or 
property  of  another,  or  for  alimony  due  or  to  become  due,  or  for 
maintenance  or  support  of  wife  or  child,  or  for  seduction  of  an 
unmarried  female,  or  for  criminal  conversation;  (3)  have  not  been 
duly  scheduled  in  time  for  proof  and  allowance,  with  the  name  of 
the  creditor  if  known  to  the  bankrupt,  unless  such  creditor  had 


LEGAL  REDRESS— THE  BANKRUPTCY  ACT'        317 

notice  or  actual  knowledge  of  the  proceedings  in  bankruptcy; 
or  (4)  were  created  by  his  fraud,  embezzlement,  misappropri- 
ation, or  defalcation  while  acting  as  an  officer  or  in  any  fiduciary 
capacity." 


The  administration  of  the  law  is  reposed  in  two  sets 
of  officers,  known  as  referees  and  trustees.  Referees  are 
appointed  by  the  judges  of  the  United  States  district 
courts ;  their  powers  are  judicial,  and  extensively  so.  Trus- 
tees are  those  elected  by  the  creditors  to  take  charge  of  a 
bankrupt  estate,  a  majority  in  number  and  amount  of 
provable  claims  being  necessary  to  effect  the  election  of 
the  trustee.  Where  creditors  cannot  agree  upon  a  trustee, 
the  referee  may  appoint  him,  his  action,  however,  being 
reviewable  by  the  district  court,  Eeferees  are  required  to 
furnish  bonds  in  not  more  than  $5,000 ;  the  amount  of  the 
bond  to  be  furnished  by  the  trustee  is  fixed  by  the  creditors. 
If  the  creditors  should  fail  to  do  this,  the  court  is  author- 
ized to  do  so. 

The  strongest  merit  of  the  bankruptcy  act  is  the  au- 
thority vested  in  the  creditors.  They  are  the  arbiters  as 
to  practically  everything  that  shall  be  done  in  the  admin- 
istration of  a  bankrupt  estate.  They  elect  the  trustee,  fix 
his  bond,  pass  on  almost  every  question  that  is  presented, 
and,  best  of  all,  they  may  examine  the  bankrupt.  This 
examination  of  the  bankrupt  is  one  of  the  salient  points  of 
the  law.  It  enables  creditors  to  learn  from  the  bankrupt 
under  oath  exactly  how  he  has  managed  his  business. 
"While  no  provision  of  this  character,  however  drastic,  will 
overcome  perjury,  still  in  this  way  a  creditor  can  secure 
the  information  which  he  should  have  before  signing  a 
composition  or  determining  whether  he  should  oppose  the 


318  CREDIT  AND  ITS  USES 

discharge  of  the  bankrupt.  lu  this  and  numberless  other 
respects  is  evinced  the  great  advantage  of  the  bankruptcy 
act  over  State  procedure.  If  creditors  are  watchful  of 
their  interests  it  is  an  impossibility  for  an  estate  to  be  dis- 
honestly administered.  The  law  contains  provisions  for 
keeping  a  creditor  well  informed,  and  no  meeting  is  legal 
for  which  notices  have  not  been  sent;  ample  time  is  pro- 
vided in  respect  to  such  notices. 

The  greatest  evil  from  which  commercial  interests  suf- 
fered in  the  absence  of  a  national  bankruptcy  law  resulted 
from  the  practice  of  insolvent  debtors  preferring  certain 
creditors.  The  system  of  preferences  is  not  only  sanc- 
tioned, but  encouraged,  by  the  laws  of  many  of  the  States. 
It  may  be  asked  why  a  State  is  not  disposed  to  be  as  just 
in  its  treatment  of  creditors  as  Congress  would  be.  The 
reason  is  obvious.  State  laws  for  the  administration  of 
debts  are  enacted  in  the  interests  of  home  creditors,  viz., 
those  residing  within  the  State.  The  citizens  of  a  State 
consider  that  if  it  is  possible  to  secure  any  advantage, 
they  are  entitled  to  it,  even  though  it  may  be  an  undue 
advantage  over  those  who  reside  and  do  business  out  of 
the  State.  Further,  a  home  creditor  has  an  advantage 
over  a  creditor  residing  in  another  State,  as  he  is  able  to 
watch  a  debtor  at  closer  range,  the  element  of  contiguity 
being  in  his  favor  and  enabling  him  to  quickly  detect  un- 
favorable conditions  in  the  debtor's  afPairs.  The  ability  to 
acquire  unfavorable  information  more  promptly  than  could 
an  outside  creditor  would  prove  of  little  value  unless  resi- 
dents Avere  advantaged  under  tlie  law.  This  recompense 
has  been  given  to  them  through  laws  that  enable  home 
creditors  to  expeditiously  attach  the  effects  of  the  debtor, 
secure  mortgages,  bills  of  sale,  or  profit  by  many  of  the 


LEGAL  REDRESS— THE  BANKRUPTCY  ACT        319 

devious  methods  that  are  the  offspring  of  the  preferential 
system.  Preferring  home  creditors  is  the  idea  underlying 
the  system  of  preferences,  although  its  practice  has  not 
been  confined  to  favors  extended  to  them,  but  has  been  per- 
sistently invoked  in  behalf  of  creditors  foreign  to  the  State, 
primarily  those  who  have  extended  large  credits.  This 
system  constituted  the  groundwork  of  much  injustice,  and 
its  pernicious  effects  impelled  the  creditors  of  the  country 
to  ask  for  a  national  law  that  would  suspend  the  State 
preferential  laws  and  place  all  creditors,  large  and  small, 
influential  and  humble,  powerful  and  weak,  upon  the  same 
basis. 

In  order  to  meet  this  essential  question,  the  bankruptcy 
act  provides  that  if  a  debtor  while  insolvent  has  given  a 
preference  within  four  months  before  the  filing  of  a  peti- 
tion in  bankruptcy,  or  after  the  filing  of  the  petition  and 
before  the  adjudication,  the  effect  of  which  was  to  give 
any  one  of  his  creditors  a  greater  percentage  of  his  debt 
than  any  other  creditor  of  the  same  class,  all  such  prefer- 
ences shall  be  voidable.  It  is  generally  assumed  that  a 
man's  insolvency  dates,  not  from  a  few  days  prior  to  his 
application  to  be  declared  a  bankrupt  or  the  filing  of  an 
involuntary  petition  against  him,  but  that  insolvency  is  a 
matter  of  gradual  development.  Experience  has  shown 
that  even  after  a  man  may  know  that  he  is  insolvent,  he 
makes  an  effort,  and  very  often  a  heroic  one,  to  overcome 
this  condition,  but  without  success.  Therefore,  the  law 
presumes  that  a  condition  of  insolvency  has  prevailed  for 
some  time,  and  in  order  to  reach  all  cases  where  prefer- 
ences may  have  been  given  during  the  probable  term  of 
such  insolvency,  four  months  has  been  prescribed  as  the 
period  during  which  preferences,  if  given,  may  be  voided. 


320  CREDIT  AND  ITS  USES 

Such,  in  brief,  is  the  scope  of  the  National  Bankruptcy 
Act  of  1898. 

In  their  earlier  functions  bankruptcy  systems  were 
creditors'  laws.  The  broadening  of  their  scope  has  con- 
ferred their  benefits  upon  debtors  as  well  as  creditors. 
While  the  laxity  of  certain  provisions  of  our  present  stat- 
ute may  result  in  dishonest  debtors  reaping  unjust  gains 
at  the  expense  of  their  creditors,  these  cases  are  exceptional. 
The  opportunities  to  prey  upon  creditors  will  disappear 
as  the  necessity  for  strengthening  the  law  makes  itself  evi- 
dent, and  such  changes  as  are  required  will  be  incorporated 
in  the  act. 

The  following  have  been  cited  as  the  principal  advan- 
tages resulting  to  the  people  from  the  administration  of 
the  present  bankruptcy  act : 

1.  "The  prevention  of  preferences." 

2.  "The  excellent  influence  of  the  law  in  enforcing  concert 
of  action  and  mutual  terms  of  settlement  without  recourse  to  legal 
proceedings." 

3.  "The  expeditious  adjudication  of  bankrupts,  as  distin- 
guished from  the  tedious  and  expensive  processes  common  to  State 
courts." 

4.  "The  election  of  the  trustee  by  the  creditors." 

5.  "The  examination  of  the  bankrupt  by  creditors." 

6.  "The  adjustment  of  bankruptcies  through  compositions 
with  the  knowledge  and  under  the  direction  of  the  court." 

7.  "The  prompt  administration  of  estates  and  an  avoidance 
of  the  usual  vexatious  delays  in  litigation." 

8.  "The  use  of  contempt  proceedings  to  effect  the  recovery 
of  property." 

9.  "The  institution  of  ancillary  proceedings  to  reach  property 
lying  in  different  States." 

10.  "The  sale  of  real  estate  clear  of  liens." 

11.  "The  settlement  of  the  affairs  of  corporations  in  bankruptcy 
in  the  interests  of  creditors  and  stockholders." 


LEGAL  REDRESS— THE  BANKRUPTCY   ACT        321 

12.  "The  reduction  in  expenses  incident  to  failed  accounts; 
notably  in  the  case  of  attorneys'  fees." 

13.  "The  acquirement  of  increased  di\'idends  from  insolvent 
estates." 

14.  "The  punishment  of  fraudulent  bankrupts." 

15.  "The  administration  of  insolvent  estates  wholly  in  charge 
of  the  creditors  interested." 

The  student  who  inclines  to  the  States'  Rights  theory- 
may  ask  if  it  is  not  possible  to  secure  all  these  advantages 
under  the  operations  of  the  State  system,  or  whether  the 
States  cannot  legislate  quite  as  forcefully  in  the  interests 
of  creditors  as  Congress.  The  answer  is  that  the  States 
could  do  so  if  they  desired,  and  an  absolutely  uniform  law 
could  he  adopted  by  all  the  States ;  hut  even  assuming  that 
every  State  had  the  same  insolvency  law,  the  operation  of 
such  a  law  in  the  State  of  Kansas  would  not  be  controlling 
upon  the  actions  of  a  creditor  residing  in  the  State  of  Ne- 
braska ;  for  it  is  a  settled  principle  that  the  laws  of  a  State 
have  no  extraterritorial  effect. 

Our  experience  under  both  the  Articles  of  Confedera- 
tion and  the  Constitution  has  shown  that  the  States  have 
no  disposition  to  frame  legislation  on  uniform  lines.  The 
habits  and  proclivities  of  the  people  of  the  several  States 
are  as  distinctive  as  those  of  the  people  of  different  nations. 
That  no  uniformity  of  State  statutes  is  probable  is  conclu- 
sively proved  by  the  existence  of  the  present  State  statutes 
on  the  subject  of  bankruptcies  and  insolvencies.  There  are 
no  two  States  that  have  exactly  the  same  system,  and  the 
time  may  never  come  when  such  uniformity  will  be  fol- 
lowed. 

"It  certainly  cannot  be  claimed  that  any  benefit  arises  from 
this  comparison  and  contradiction ;  that  the  rights  of  either  creditor 


322  CREDIT  AND  ITS  USES 

or  debtor  are  subserved  thereby.  Among  absolutely  independent 
and  sovereign  nations,  there  will,  of  course,  be  more  or  less  diversity 
of  municipal  laws;  and  persons  engaged  in  foreign  trade  and  com- 
merce must  necessarily  be  put  to  some  inconvenience.  But  even 
among  independent  nations  the  tendency  of  the  present  age  is  to 
assimilate  their  systems  of  commercial  and  mercantile  law.  Among 
the  several  States  of  the  Union  this  diversity,  and  its  accompany- 
ing inconvenience,  need  not  exist.  The  Constitution  confers  upon 
Congress  full  power  virtually  to  ordain  one  set  of  rules  governing 
the  relations  of  debtor  and  creditor  throughout  the  whole  extent 
of  the  country.  The  'uniformity'  permitted  by  the  organic  law 
would  render  a  discharge  in  one  State  binding  in  all  others;  would 
establish  the  same  acts  and  defaults  of  the  debtor  as  occasions  for 
bankrupt  proceedings  in  every  section ;  would  abolish  the  iniquitous 
privilege  of  making  preferential  assignments;  would  enable  the 
merchant  in  New  York  or  Philadelphia  who  sells  on  credit  to  a 
trader  in  Illinois  or  Kentucky,  to  feel  certain  that  when  the  time  for 
payment  should  arrive,  his  debtor  would  not  have  failed,  and  placed 
his  assets  completely  beyond  the  reach  of  the  deceived  and  ex- 
asperated creditor."  (Pomeroy,  "An  Introduction  to  the  Con- 
stitutional Law  of  the  United  States.") 

It  is  the  fundamental,  inherent,  unavoidable,  and  un- 
controllable features  of  our  system  of  State  government 
that  utterly  disparage  the  probability  of  the  States  framing 
laws  that  will  be  equally  and  justly  operative  toward  the 
citizens  of  the  entire  country  without  respect  to  the  State 
of  their  residence,  that  renders  a  national  law  necessary. 
This  sentiment  constituted  the  principle  that  moved  the 
people  to  ask  for  the  enactment  of  the  present  Xational 
Bankruptcy  Act,  and  it  is  upon  this  same  principle  that 
there  is  based  the  demand  for  a  permanent  national  bank- 
ruptcy system.  Public  policy',  commercial  security,  and 
the  stability  of  credit  are  the  foundation  stones  of  this 
demand. 


CHAPTER   XIX 

THE    EFFOET    TO    SYSTEMATIZE    PEOTECTION    FROM    CREDIT 
LOSSES CREDIT    INSURANCE 

Credit  losses  are  a  corollary  of  the  credit  system.  The 
proposition  has  been  submitted  that  if  there  were  no  credit 
there  would  be  no  debt,  and  it  is  reco^ized  that  the  exten- 
sion of  credit  carries  with  it  the  certainty  of  losses  from 
uncollectible  accounts.  Wherever  credit  has  been  given, 
losses  have  followed.  The  test  of  the  premise  that  losses 
are  an  inevitable  result  of  giving  credit,  is  afforded  in  the 
experience  of  any  concern  for  a  given  number  of  years; 
and  the  averages  of  this  experience  prove  that  bad  debts 
baffle  the  prescience  of  the  credit  man  and  the  best  devel- 
oped systems  of  credit-office  administration.  Losses  may 
be  greatly  minimized  through  efficient  management,  but 
the  intangible  forces  that  enter  into  credit  transactions 
disparage  the  complete  avoidance  of  credit  losses. 

The  credit  man's  objective  point  is  the  reduction  of 
losses  to  a  minimum.  When  he  succeeds  in  holding  bad 
debts  within  a  percentage  regarded  as  a  normal  loss  in 
his  trade,  without  unduly  restricting  sales,  he  exhibits  the 
type  of  ability  necessary  in  credit  work.  A  moderate  per- 
centage of  credit  losses  is  regarded  as  a  certainty,  to  the 
same  extent  as  depreciation  in  the  value  of  goods  is  ex- 
pected.   These  two  elements  of  loss  are  looked  for  in  every 

323 


324  CREDIT  AND  ITS  USES 

commercial  calling,  and  provision  made  to  cover  them  by 
adding  to  the  selling  price  of  all  goods  the  percentage  of 
loss  the  firm  will  normally  sustain  from  these  causes. 
This  method,  which  is  a  system  of  insurance,  results  in  an 
added  cost  to  the  consumer ;  so  that,  as  an  economic  propo- 
sition, the  entire  human  family  is  charged  with  the  fortui- 
tous losses  of  commerce. 

Credit  losses  being  regarded  as  a  certainty,  it  is  natu- 
ral'that  efforts  should  be  made  to  protect  the  losers.  Losses 
from  fire,  marine  disasters,  accidents  to  life,  and  other 
causes,  occur  with  a  regularity  that  enables  those  inter- 
ested to  compute  with  reasonable  accuracy  the  average 
losses  due  to  them  in  a  stated  period.  A  commercial  en- 
terprise may  suffer  a  loss  from  fire  only  once  in  a  long 
career ;  it  may  never  have  such  a  loss ;  but  if  it  be  doing 
a  credit  business,  there  will  in  all  probability  be  losses  from 
bad  debts  every  year.  The  question  arises.  Why  should 
not  the  same  care  be  taken  to  protect  sufferers  from  credit 
losses  as  to  compensate  for  losses  from  fire  and  other  casu- 
alties, which  are  the  result  of  the  negligence,  ignorance, 
and  moral  delinquency  of  individuals,  or  the  disturbances 
of  nature  ?  The  means  suggested  for  doing  this  are  com- 
prehended in  credit  insurance. 

Are  credits  susceptible  to  the  operations  of  the  princi- 
ples of  insurance  that  apply  to  all  other  elements  in  which 
there  is  an  appreciable  hazard  ?  The  first  question  to 
decide  is,  "  What  is  an  insurable  risk  ?  "  It  is  defined 
thus: 

"An  insurable  risk  ...  is,  (1)  any  chance  of  loss  depending 
on  the  occurrence  of  any  uncertain  event  .  .  .  provided  (2) 
there  are  sufficient  data  to  enable  the  degree  of  probability  to  be 
estimated,  and  provided  (3)  it  is  of  such  a  nature  that  the  insured 


CREDIT  LOSSES  325 

cannot  too  easily  make  use  of  the  insurance  for  his  own  economic 
advantage." 

(1)  The  chances  of  loss  in  credits  depend  on  uncertain 
events;  that  is  to  say,  the  character  of  the  losses  is  not 
always  the  same ;  their  frequency  is  not  always  the  same ; 
at  times  they  are  of  slight  degree,  and  at  others  are  aug- 
mented.    They  are  uncertain  events. 

(2)  Is  there  sufficient  data  to  scientifically  estimate 
the  degree  of  probability  of  loss  ?  There  is  sufficient  data, 
and  it  may  be  acquired ;  but  whether  any  positive  attempt 
has  ever  been  made  to  do  so  is  improbable.  The  statistics 
of  losses  published  by  the  mercantile  agencies  are  no  doubt 
accurate  statements  of  the  losses  of  which  the  agencies  have 
cognizance;  but  there  are  losses  in  credits  of  which  the 
agencies  never  know  anything.  Therefore  these  statistics 
are  not  conclusive  as  to  the  full  import  of  credit  losses. 
There  are  accounts  dragged  along  from  year  to  year,  in 
the  hope  that  something  may  be  realized  from  them,  until 
the  debtor  quietly  goes  out  of  business,  and  these  debts  are 
buried  in  the  deep  bosom  of  the  profit  and  loss  account. 

Further,  What  of  the  vast  losses  that  take  place  in  indi- 
vidual credit?  What  is  known  of  their  extent?  a  subject 
to  which  attention  was  called  in  the  chapter  on  "  Indi- 
vidual Credit."  The  element  of  hazard  figures  in  all 
branches  of  credit.  If  transactions  of  one  division  are 
subject  to  insurance,  so  are  the  transactions  of  all.  It  will 
be  said  that  the  plan  upon  which  credit  insurance  is  oper' 
ated  answers  the  first  two  objections,  for  the  reason  that 
the  indemnity  is  based  on  a  firm's  statement  of  all  its  losses 
for  a  period  of  years,  and  that  in  this  statement  will  be 

included  all  losses,  whether  they  are  the  result  of  specific 
23 


326  CREDIT  AND  ITS  USES 

and  publicly  reported  failures,  or  the  losses  due  to  dry  rot. 
It  is  true  that  this  is  the  system  followed,  but  who  will 
attempt  to  say  that  this  basis  is  as  scientific  as  that  on 
which  fire  and  marine  losses  rest  ?  In  the  latter  the  aver- 
age losses  have  been  determined  by  means  that  are  subject 
to  public  knowledge.  The  losses  are  determined  by  expert 
and  impartial  appraisement.  If  there  is  a  usufruct  of  sal- 
vage it  is  considered  in  the  approximation  of  the  average 
losses.  Credit  insurance,  up  to  this  time,  has  made  but  the 
barest  attempt  to  reduce  the  question  of  the  "  degree  of 
probability  "  to  the  same  scientific  basis  followed  by  the 
other  branches  of  insurance.  The  fact  that  credit-insur- 
ance premiums  have  trebled  since  it  was  first  instituted 
proves  that  it  has  been  an  experiment  solely.  The  tend- 
ency of  fire-insurance  rates  has  been  downward,  showing 
that  the  refining  process  which  has  been  applied  to  the 
methods  controlling  that  branch  of  insurance  have  made 
for  a  reduction  in  the  cost  to  the  assured,  although  there 
is  no  doubt  that  well-managed  fire-insurance  companies 
have  been  paying  enterprises. 

Credit  insurance  as  practiced  does  not  aim  to  indem- 
nify a  man  to  the  full  extent  of  his  losses,  but  only  to  reim- 
burse him  on  account  of  what  is  called  his  abnormal  loss — 
by  which  is  meant  that  amount  of  losses  which  exceeds  his 
average  or  ''  own  "  loss.  A  certain  percentage  of  "  own  " 
loss  is  established,  based  on  the  average  losses  of  a  firm 
for  a  given  number  of  years.  As  an  example,  we  will  con- 
sider a  business  whose  sales  reach  $1,000,000.  The  aver- 
age loss  has  been  one-half  of  one  per  cent  for  a  period  of 
five  years.  Credit  insurance  requires  that  when  a  man 
takes  out  an  insurance  policy  he  must  first  lose  the  aver 
age  or  "  own  "  loss  of,  say,  one-half  of  one  per  cent  befoni 


CREDIT  LOSSES  327 

he  can  call  upon  the  insurance  company  for  relief ;  for  in- 
stance, his  policy  is  $15,000  and  his  own  loss  $5,000 ;  if  he 
should  lose  only  $5,000  during  the  year  in  which  the  policy 
is  in  force,  he  would  have  no  claim  upon  the  company; 
if  he  lose  $10,000,  he  can  prove  his  claim  to  the  amount 
of  $5,000.  If  his  losses  were  $17,000,  he  could  prove  only 
to  the  extent  of  $10,000,  the  difference  between  his  ovni 
loss  and  the  face  of  the  policy.  But  why  this  own  loss  at 
all,  if  credits  can  be  insured  ?  Reasons  have  been  advanced 
to  justify  it — some  plausible,  others  fanciful.  It  is  urged 
that  as  a  man  always  expects  to  have  a  certain  percentage 
of  losses,  he  provides  against  them  by  adding  a  percentage 
to  the  selling  price  of  goods,  and  his  customers  thus  reim- 
burse him  for  the  loss ;  that  what  he  loses  above  this  figure 
is  abnormal  and  unprovided-for  loss.  If  a  merchant's  cus- 
tomers reimburse  him  for  his  average  loss,  then  in  effect 
he  has  no  loss  at  all,  and  his  bad  debts  are  simply  debited 
against  his  merchandise  account.  Assume  that  he  has  an 
unexpected  loss  during  a  year,  raising  his  losses  from  one- 
half  of  one  per  cent  to  one  per  cent,  why  can  he  not  add 
an  increased  percentage  to  the  selling  price  of  his  goods  ? 
What  simpler  system  of  insurance  ?  If  it  is  scientific  to 
add  the  percentage  of  his  average  or  "  own  "  loss  to  the 
selling  price  of  goods,  it  would  be  equally  scientific  to 
increase  the  rate.  Ah !  but  some  one  says,  he  knows  what 
the  average  loss  is,  but  he  does  not  know  what  the  abnormal 
will  be.  The  average,  if  it  be  a  correct  average,  must  com- 
prehend the  abnormal,  and  can  be  computed  from  year  to 
year. 

It  may  be  asserted  in  answer  to  this,  that  where  goods 
are  sold  upon  a  close  margin  it  would  not  be  possible  to 
add  anything  to  the  selling  price  over  a  very  moderate  or 


328  CREDIT  AND  ITS   USES 

normal  percentage,  to  cover  losses  from  bad  debts,  without 
unduly  increasing  the  price,  and  thus  inviting  inability  to 
make  sales.  If  the  addition  of  a  percentage  sufficient  to 
cover  such  losses  is  not  feasible,  then  the  "  own  "  loss  the- 
ory is  a  fallacious  one.  Take  the  case  cited  where  losses 
had  been  increased  from  one-half  of  one  per  cent  to  one  per 
cent;  a  concern  is  carrying  credit  insurance  as  practiced, 
and  has  been  assuming  an  "  own  "  loss  of  one-half  of  one 
per  cent ;  it  charges  this  to  the  selling  price  of  goods ;  the 
following  year,  however,  its  losses  are  one  per  cent.  The 
policy  of  the  credit-insurance  company  will  be  to  increase 
the  "  own  "  loss,  and  unless  the  merchant  submits  to  the 
increase  to  decline  to  write  a  new  policy.  Assuming  that 
the  merchant  surrenders,  how  is  he  going  to  dispose  of  his 
increased  "  own  "  loss  ?  He  must  add  it  to  the  selling 
price  of  goods. 

The  failures  reported  by  Messrs.  K.  G.  Dun  &  Co.  for 
the  year  1904  in  commercial  circles  amount  to  $144,202,- 
311.  These  figures  include  the  "own"  and  abnormal 
losses,  but  do  not  comprehend  the  losses  occurring  from 
accounts  that  are  not  listed  among  the  reported  failures  as 
before  described,  or  the  losses  occurring  in  "  individual 
credit."  The  point  to  be  considered  is  this:  Whether  this 
amount  of  $144,202,311,  including  as  it  does  the  "  own  " 
losses,  is  susceptible  to  the  operations  of  insurance.  If  it 
is,  then  the  "  own "  loss  theory  is  an  untenable  one. 
Would  the  cost  of  sustaining  this  amount  of  insurance 
prove  too  great  a  strain  upon  the  commercial  interests  of 
the  country?  If  it  would,  then  credit  insurance  is  not 
feasible ;  if  it  would  not,  then  credit  insurance  is  entirely 
feasible,  and  the  "  own "  loss  theory  again  falls  to  the 
ground. 


CREDIT  LOSSES  329 

An  advocate  of  credit  insurance  says,  while  defending 
the  "  own  "  loss  principle : 

"It  would  be  folly  to  demand  that  the  Indemnity  Company 
should  underwrite  the  full  loss  in  a  year,  as  no  company  could 
withstand  the  $160,000,000  of  losses  per  annum  which  occur  from 
bad  debts  in  this  country." 

This  statement  would  move  one  to  ask  why,  if  credit  in- 
surance is  analogous  to  fire  insurance  (and  it  is  generally 
claimed  to  be  so),  insurance  companies  should  not  be  able 
to  withstand  the  loss  of  $160,000,000  per  annum  in  credits 
if  they  are  able  to  stand  losses  of  $141,000,000,  the  amount 
actually  paid  by  the  fire-insurance  companies  in  1904. 
The  figures  of  $160,000,000  are  evidently  reported  lia- 
bilities, but  there  must  be  deducted  the  assets  of  the  estates 
represented.  For  instance,  although  the  liabilities  from 
commercial  failures  reported  for  1904  were  $144,202,311, 
there  were  assets  reported  in  these  failures  of  $84,438,076. 
These  assets  are  undoubtedly  subject  to  considerable  scal- 
ing, as  the  figures  are  no  doubt  taken  from  the  first  reports 
of  failed  estates  and  are  not  the  actual  amounts  realized 
from  the  sales  of  property  and  the  collection  of  accounts; 
so  that  the  liabilities  of  $160,000,000  per  annimi  do  not 
necessarily  mean  that  credit-insurance  companies  would 
have  to  pay  out  this  amount.  The  payments  made  by  the 
fire-insurance  companies  in  the  year  1904  prove  that  the 
amount  that  must  be  paid  is  not  the  only  important  con- 
sideration ;  the  economic  accuracy  of  the  plans  and  the  uni- 
versal distribution  of  the  risks  involved  being  necessary 
elements  of  correct  insurance.  When  one  considers  the 
gross  capital  employed  in  business,  or  the  gross  amount  of 
business  transacted,  the  figures  $144,202,311  need  cause 
no  consternation. 


330  CREDIT  AND  ITS  USES 

It  •will  be  evident  without  any  long  mathematical  dem- 
onstration that  the  commercial  interests  of  this  country 
are  fully  able  to  bear  the  ex])ense  of  insuring  losses.  If 
a  system  can  be  devised  which  will  insure  credits  within 
reasonable  limitations,  then  it  will  not  be  necessary  to  add 
to  the  selling  price  of  goods  the  percentage  or  ratio  of 
failed  accounts  included  in  the  "  own  "  loss  class,  and  the 
cost  of  goods  to  consumers  will  be  reduced  to  that  extent. 
Even  assuming  that  there  is  never  any  necessity  for  in- 
creasing the  "  OUT! "  loss  percentage  in  computing  the 
price  of  goods,  there  is  an  item  which  must  be  added  to 
the  selling  price,  and  that  is  the  cost  of  the  credit  insur- 
ance. This  cost  is  a  legitimate  expense,  if  it  be  proper 
to  carry  credit  insurance  at  aU.  When  these  two  items, 
"  own  "  loss  and  "  cost  of  credit  insurance  "  are  consid- 
ered together,  as  they  should  be,  the  question  immediately 
arises  as  to  the  business  wisdom  of  the  outlay,  this  depend- 
ing entirely  upon  the  economic  utility  of  credit  insurance, 
its  scientific  operation,  and  its  adaptability  to  the  special 
line  of  business. 

It  may  be  said  that  in  the  last  analysis  there  is  no  dif- 
ference between  charging  the  "  own  "  loss  account  to  the 
consumer  or  increasing  the  expenses  for  insurance.  The 
question  upon  which  we  are  working  is  whether  credits 
can  be  insured,  and  if  it  is  not  feasible  or  proper  to  insure 
what  are  called  "  own  "  losses,  that  question  might  just  as 
well  be  settled  and  credit  insurance  given  its  right  name, 
which  would  probably  be,  "  insurance  to  cover  extraordi- 
nary losses  in  credits."  You  must  make  somebody  else  pay 
your  "  own  "  losses.  Further,  the  "  own  "  loss  theory 
must  not  be  confused  with  the  principle  of  coinsurance. 

Spreading  risks  among  a  very  large  number  of  persons 


CREDIT  LOSSES  331 

minimizes  the  degree  of  risk  in  each  particular  case,  and 
reduces  the  cost  of  insurance  to  each  individual. 

The  insurance  of  credits  must  of  necessity  be  regulated 
so  as  to  prevent  recklessness  in  the  extension  of  credits. 
Credit  givers  should  not  be  permitted  to  take  extreme 
chances,  feeling  that  they  would  be  able  to  recoup  them- 
selves through  credit  insurance,  or  "  to  easily  make  use  of 
the  insurance  for  their  own  economic  advantage."  Reck- 
lessness in  giving  credit  with  a  view  to  such  protection 
would  defeat  the  very  idea  upon  which  insurance  as  an 
abstract  proposition  is  grounded,  and  no  system  of  insur- 
ance could  obtain  for  any  length  of  time  where  the  assured 
was  not  governed  by  certain  specific  rules  in  his  manage- 
ment or  care  of  property  (credits  are  property).  This 
idea  has  been  approached  by  those  selling  credit  insurance, 
in  the  restrictions  imposed  upon  the  assured  as  to  the  lim- 
its of  accounts  that  will  be  provable  under  the  policies. 
These  limits  are  based  upon  certain  percentages,  either  of 
the  capital  ratings  of  those  to  whom  goods  are  sold  by  the 
assured,  or  percentages  of  the  business  done,  where  policies 
are  written  upon  the  experience  plan.  Adherence  to  these 
restrictions  has  made  for  safer  credits. 

The  second  most  important  consideration  arising  in 
credit  insurance  is  the  accomplishment  of  the  largest  pos- 
sible saving  from  doubtful  and  failed  accounts.  No  sys- 
tem of  credit  insurance  is  adequate  that  does  not  compre- 
hend the  control  of  all  doubtful  and  failed  accounts  which 
are  provable  under  the  policies.  For  the  information  as  to 
the  exact  status  of  these  accounts,  credit  insurance  has 
depended  upon  the  mere  statements  of  the  assured  or  attor- 
neys representing  them.  There  is  no  doubt  that  in  a  very 
large  percentage  of  cases  reports  made  as  to  the  conditions 


332  CREDIT  AND   ITS  USES 

of  these  accounts  are  correct,  according  to  the  belief  of  the 
assured  or  their  representatives,  but  the  weakness  of  the 
system  consists  in  this,  that  these  accounts  have  not  been 
under  the  direct  charge  of  the  insurance  companies,  who 
have  not  been  in  a  position  to  know  whether  everything  that 
could  possibly  have  been  done  to  save  an  account,  or  a  por- 
tion of  it,  has  been  accomplished.  Sending  an  account  to 
an  attorney,  having  him  investigate  it  and  report  that  it  is 
uncollectible,  then  reducing  it  to  judgment,  or  seeing  it 
wiped  out  by  the  discharge  of  a  bankrupt,  is  not  the  most 
scientific  wa^'  of  saving  accounts. 

The  purpose  of  credit  insurance  should  be  largely  pre- 
ventive against  losses.  When  the  time  arrives  that  the 
very  fact  of  an  account  being  in  a  doubtful  condition  will 
warrant  reporting  it  to  the  credit-insurance  company,  and 
the  majority  of  those  interested  in  the  case  invited  to  con- 
cert of  action,  then  a  practical  prevention  of  losses  will 
take  place.  Such  accounts  can  be  thoroughly  treated  and 
estates  administered  with  slight  expense ;  businesses  saved 
that  might  have  been  riiined  through  individual  action  on 
the  part  of  creditors,  each  suspicious  of  the  other ;  and  men 
saved  from  bankruptcy  because  intelligent  action  will  pro- 
tect them  from  this  fate.  All  this  is  just  as  legitimate  a 
function  of  credit  insurance  as  the  control  of  damaged 
property  by  fire-insurance  companies  or  the  assumption  by 
a  fidelity  company  of  a  claim  against  an  embezzler.  The 
system  which  will  avoid  failures,  administer  embarrassed 
estates  with  a  minimum  of  expense,  and  reduce  the  expense 
incident  to  failed  estates,  will  be  a  real  system  of  credit 
insurance,  for  its  purpose  will  be  not  only  to  reimburse 
against  losses  but  to  reduce  the  expenses  of  such  insurance 
by  the  avoidance  of  losses.     Doubtful  or  failed  accounts 


CREDIT  LOSSES  333 

should  be  adjusted  by  the  adjuster  of  the  credit-insurance 
company.  The  object  of  such  adjustment  is  not  to  provoke 
litigation,  but  to  avoid  it ;  not  to  act  as  a  mere  distributor 
of  collections  to  commercial  lawyers,  as  the  object  to  be 
gained  is  a  decrease  and  not  an  increase  of  expenses.  It 
is  to  the  interests  of  the  credit-insurance  companies  to  see 
that  the  stock  of  a  failed  business  brings  the  highest  pos- 
sible figure,  and  to  jDrevent  if  possible  the  wasting  of  its 
value  through  an  ordinary  bankrupt  sale. 

The  principles  upon  which  credit  insurance  should  rest 
are  (1)  protection  against  all  losses  incurred,  and  (2)  the 
conservation  of  the  assets  of  embarrassed  estates.  Credit 
insurance  has  been  a  much  discussed  subject ;  but  it  would 
appear  that  too  much  of  the  discussion  has  hinged  on  the 
interpretation  of  the  phraseology  of  the  policies  and  the 
difficulties  encountered  in  making  satisfactory'  adjustments 
when  the  credit  man  has  attempted  to  prove  a  loss. 

Credit  insurance,  founded  upon  scientific  bases,  with 
the  degree  of  probability  of  loss  worked  out  to  a  scientific 
demonstration,  providing  for  the  conservation  of  estates 
under  such  auspices  as  have  been  indicated,  as  an  item 
of  expense  reduced  to  the  lowest  possible  figure  commen- 
surate with  due  protection  to  the  assured  and  a  fair  return 
on  the  investment  to  the  insurance  company,  will  be  a  safe- 
guard to  credit  giving  and  a  stimulus  to  commerce. 


CHAPTER   XX 

ORGANIZATION    AND    EDUCATIOXAL    MOVEMENTS    IN    CREDIT 

(A)   ORGANIZATION    FOR    THE    IMPROVEMENT    OF    CON- 
DITIONS  AFFECTING   CREDIT 

Organized  efforts  for  the  improvement  of  conditions 
affecting  credit  were  instituted  in  the  year  1896.  This 
movement  was  the  outgrowth  of  discussions  which  took 
place  at  the  World's  Mercantile  Congress  (June  19-2G, 
1893),  held  under  the  auspices  of  the  management  of  the 
great  Chicago  Exposition.  The  announcement  of  this  con- 
gress contained  the  following  statement :  "  It  is  hoped  that 
this  congress  may  be  the  means  of  laying  the  foundation 
for  permanently  organized  effort  for  the  better  regulation 
of  mercantile  credits  in  the  future."  Among  the  questions 
which  it  was  proposed  to  discuss  were  the  following : 

"How  can  we  raise  the  standard  of  credit,  reduce  its  dangers 
and  losses,  and  at  the  same  time  extend  and  increase  its  usefulness 
to  ourselves  and  others?  " 

"How  can  the  quality  of  information  concerning  debtors  and 
the  present  facilities  for  obtaining  it  be  improved?" 

"Would  it  be  practicable,  through  cooperation,  to  establish 
a  standard  of  requirements  for  credit  basis?" 

Toward   the  close  of  this  congress   a   resolution   was 
adopted  for  the  appointment  of  a  committee  to  organize  a 
national  association;  but  nothing  was  done  through  this 
334 


ORGANIZATION  AND  EDUCATIONAL  MOVEMENTS    335 

channel.  Three  years  after  the  Mercantile  Congress  had 
met,  the  National  Association  of  Credit  Men  was  organized 
at  Toledo,  Ohio.  Prior  to  this,  credit  associations  were 
formed  in  a  few  cities,  and  these  so-called  local  organiza- 
tions were  the  nucleus  of  the  national  movement.  There 
had  been  credit  companies,  or  bureaus  for  the  exchange  of 
credit  information  and  the  collection  and  adjustment  of  ac- 
counts, in  existence  for  a  number  of  years  ;  but  the  National 
Association  of  Credit  Men  was  the  first  body  that  ever 
successfully  attempted  to  accomplish  an  improvement  in 
the  conditions  surrounding  credit  based  upon  ethical  and 
educational  purposes.     Its  objects  are  as  follows: 

"The  objects  of  tliis  association  shall  be  the  organization  of 
iridi\'idual  credit  men  and  of  associations  of  credit  men  throughout 
the  United  States,  in  one  central  body,  for  the  purpose  of  rendering 
more  uniform,  and  establishing  more  firmly,  the  basis  uj^on  which 
credits  in  every  branch  of  commercial  enterprise  may  be  founded, 
which  shall  include  a  demand  for  a  reform  of  the  laws  unfavorable 
to  honest  debtors  and  creditors,  and  the  enactment  of  laws  beneficial 
to  commerce  throughout  the  several  States;  the  improvement  of 
existing  methotls  for  the  diffusion  of  information,  the  gathering 
and  dissemination  of  data  in  relation  to  the  subject  of  credits; 
the  amendment  of  business  customs,  whereby  all  commercial  in- 
terests may  be  benefited  and  the  welfare  of  all  may  be  advanced; 
the  provision  of  a  fund  for  the  protection  of  members  against 
injustice  and  fraud,  and  such  other  objects  as  the  members  of  this 
association  may  determine  upon." 

It  will  be  observed  that  the  aims  of  this  organization 
conform  very  closely  to  the  statement  of  purposes  issued 
in  behalf  of  the  World's  Mercantile  Congress. 

The  credit-association  movement  has  been  a  progressive 
one,  judged  by  the  constant  accessions  to  its  membership 
and  the  activity  displaj'cd  in  developing  its  intents.     Its 


336  CREDIT  AND  ITS  USES 

greatest  success  has  been  in  the  establishment  of  friendlier 
ties  between  business  men  of  all  sections,  accompanied  by 
a  more  pronounced  and  satisfactory  diffusion  of  credit  in- 
formation. Through  its  efforts  there  has  also  been  a  grati- 
fying advance  in  the  procurement  of  legislation,  making 
for  more  equitable  relations  between  debtors  and  creditors, 
and  restricting  the  possibilities  of  frauds  upon  creditors. 
The  question  of  "  rendering  more  uniform  and  establish- 
ing more  firmly  the  basis  upon  which  credits  in  every 
branch  of  commercial  enterprise  may  be  founded  "  is  gen- 
erally recognized  as  hardly  being  susceptible  to  any  definite 
regulation,  and  the  best  that  the  credit  associations  can  do 
is  to  cultivate  among  business  men  a  higher  appreciation  of 
the  rudimentary  obligations  which  attach  to  the  dispensa- 
tion of  credit,  and  promote  adherence  thereto. 

As  an  educational  center  for  credit  men,  the  credit  asso- 
ciation has  been  a  very  important  factor.  The  members 
have  been  encouraged  to  express  their  views  upon  credit  and 
business  problems  through  the  mediimi  of  its  publications, 
and  in  this  way  a  fruitful  source  of  credit  literature  has 
been  developed.  This  is  represented  by  articles,  addresses, 
and  pamphlets  published  through  the  Business  Literature 
Department  of  the  ISTational  Association  of  Credit  Men. 
These  writings  are  in  almost  all  cases  the  work  of  business 
men.  As  Irving  has  said :  "  The  inventions  of  paper  and 
the  press  have  put  an  end  to  all  .  .  .  restraints.  They 
have  made  everyone  a  writer,  and  enabled  every  mind  to 
pour  itself  into  print  and  diffuse  itself  over  the  whole  intel- 
lectual world."  There  is  included  in  this  collection  certain 
addresses  made  at  meetings  of  the  credit  associations  by 
judges,  lawyers,  and  public  officials  on  questions  perti- 
nent to  some  phase  of  the  credit  problem.     These  writings 


ORGANIZATION  AND  EDUCATIONAL  MOVEMENTS    337 

cover  a  wide  field  and  relate  to  the  following  general 
questions : 

Accounting  and  Bookkeeping. 

Banks,  Bank  Credits,  and  Related  Questions. 

Bankruptcy  Law. 

Business  Abuses. 

Business  Principles  and  Customs. 

Credit. 

Credit  Men  and  Credit  Associations. 

Credit  Insurance. 

Credit  Lines  and  Limitations. 

Credit  Instruments. 

Collections  and  Their  Management. 

Competition. 

Cooperative  Credit  Information. 

Educational  Training  for  Business. 

Elements  of  Credit. 

Exemption  Laws. 

Business  Depressions,  Failures,  Assignments,  etc. 

Fire  Insurance  and  Its  Relation  to  Credits. 

Fraudulent  Practices. 

Legal  Aspects  of  Credit  Transactions. 

Mercantile  Agencies  and  Ratings. 

Retail  Credits. 

Salesmanship  and  Its  Relation  to  Credits. 

Statements  Reflecting  the  Financial  Condition  of  a  Business. 

Trade  Conditions. 

Terms,  Datings,  and  Discounts. 

Wholesaling  and  Jobbing. . 

(B)   THE  STUDY  OF  CREDIT 

The  tendencies  of  the  age  being  strongly  directed 
toward  specialization,  it  is  necessary  that  the  student  or 
the  practitioner  should  apply  himself  to  a  distinct  study 
of  the  particular  branch  of  business  he  expects  to  follow 


338  CREDIT  AND  ITS  USES 

or  is  following.  The  universities,  colleges,  and  schools 
have  apprehended  the  need  of  an  extension  of  their  curricu- 
lums  to  meet  this  demand  of  the  times.  It  has  been  notice- 
able that  since  the  organization  of  the  National  Associa- 
tion of  Credit  Men  and  the  interest  in  the  study  of  credit 
that  it  has  stimulated,  many  institutions  of  learning  have 
been  devoting  considerable  attention  to  the  subject  of 
credit.  It  does  not  appear  that  credit  has  been  made  a 
separate  feature  of  any  of  the  courses  in  commerce,  finance, 
or  business  administration  conducted  by  the  different  uni- 
versities and  colleges,  its  interrelationship  with  money 
and  banking  making  it  more  a  division  of  the  depart- 
ment of  political  economy.  The  treatment  of  credit  in 
these  courses  relates  to  a  study  of  its  principles  and  general 
purposes. 

An  examination  of  the  studies  included  in  the  courses 
referred  to  shows  that  it  is  the  judgment  of  the  scholastics 
that  an  understanding  of  the  higher  branches  of  business 
activity  must  be  accompanied  by  an  appreciation  of  the 
fundamental  principles  upon  which  a  question  rests,  con- 
sidered in  the  abstract  and  historically.  For  instance,  it 
is  not  presumed  that  all  a  man  needs  to  fit  him  for  the  pro- 
fession of  banking  is  to  first  carry  messages,  then  become 
a  bookkeeper,  and  finally  to  be  promoted  to  an  ofiicership; 
nor  for  a  credit  man  simply  to  pass  through  the  routine  of 
a  credit  office.  There  is  a  certain  training  which  should 
be  applied  to  the  mind,  and  which  can  only  be  acquired 
through  a  study  of  a  subject  from  its  first  principles.  It 
is  agreed  that  this  training  is  largely  "  disciplinary,"  but  it 
makes  for  a  much  better  comprehension  of  any  question, 
pnd  assists  that  "  accuracy  of  thought "  and  "  clearness 
of  expression "  so  essential  to  a  well-developed  business 


ORGANIZATION  AND  EDUCATIONAL  MOVEMENTS    339 

experience  and  judgment.  The  student  of  credit  must 
therefore  discipline  his  mind  by  a  proper  study  of  the  eco- 
nomic bases  upon  which  credit  stands.  Economics  has,  up 
to  this  time,  played  too  small  a  part  in  the  thoughts  of  the 
business  world.  Credit  men,  by  virtue  of  their  vocation 
and  the  duties  it  involves,  should  be  foremost  in  demand- 
ing that  not  alone  the  superficial,  but  the  innate  and  funda- 
mental character  of  all  questions  should  be  studied  and 
appreciated,  and  a  halt  be  called  on  the  idolatry  of  the  prac- 
tical to  the  exclusion  of  underlying  and  eternal  prer-epts. 
There  is  a  delusion  that  "  knowledge  fetters  genius,"  es- 
pecially that  character  of  knowledge  obtained  from  books. 
Frequently  men  who  have  had  only  business  training  scoff 
at  suggestions  which  may  be  the  outgrowth  of  "  courses  in 
commerce  "  and  information  d^ived  from  economic  trea- 
tises or  teachings. 

Credit  involves  an  analyzation  of  the  character  of  man 
and  the  values  of  properties  of  all  descriptions.  Economics 
covers  the  status  of  man  in  society ;  and  therefore  if  the 
credit  man  is  to  measure  with  correct  judgment  the  ele- 
ments that  determine  man's  standing  in  society,  his  char- 
acter, his  ability,  his  worth,  his  prospects,  and  his  power  of 
accomplishment,  this  can  only  be  done  by  a  knowledge  of 
the  conditions  that  surround  him,  with  which  he  deals,  and 
by  which  he  is  largely  governed.  A  man's  ability  to  inter- 
pret the  true  nature  of  these  conditions  will  be  assisted 
immeasurably  by  his  familiarity  with  those  precepts  of  hu- 
man action  and  those  principles  of  agricultural,  industrial, 
and  commercial  development  which  have  controlled  the 
destinies  of  mankind  and  promoted  the  progTCSs  of  civili- 
zation. 


INDEX 


26 


INDEX 


Abnormal  loss,  credit  insurance 
and,  326;  loss  above  certain  per- 
centage, 327;  amount  of,  diffi- 
cult to  determine,  327. 

Accommodation,  limit  of,  137; 
opinions  of  bankers  on,  137;  out 
of  proportion,  137. 

Accommodation  bills,  19,  108. 

Accounts,  receivable,  129;  carried, 
or  carrying,  212;  suspended, 
292;  value  of  suspended,  292; 
limits  of,  in  credit  insurance, 
331. 

Accounting,  credit  man  and  knowl- 
edge of,  188. 

Acts  of  bankruptcy,  under  law  of 
1867,  313;  failure  to  meet  one's 
liabilities  among,  313. 

Adjusters,  looking  after  past  due 
accounts,  277;  useful  informa- 
tion secured  by,  277;  when  im- 
{jossible  to  collect  through,  284; 
arge  claims  handled  by,  287; 
of  credit  insurance  companies, 
333. 

Adjustment  Bureaus,  collection 
letters  used  by,  282;  establish- 
ment of,  290,  292,  335;  strength 
among  credit  men's  associations, 
290, 292;  benefit  to  creditors  and 
debtors,  290. 

Administration  by  creditors,  bene- 
fits to  creditors  and  debtors, 
290;  debtors  surrendering  busi- 
ness to  creditors,  291;  business 
conducted  under,  291,  292;  less 
expensive  than  bankruptcy  act, 
291;  inevitable  result  of,  291; 
not  a  new  departure,  291;  com- 


positions aflfected  through,  291, 
292;  in  credit  insurance,  332. 

Advanced  civilization,  system  of 
credit  proof  of,  18. 

Agency  reports,  dependence  in- 
volved in,  191;  well-thought-out, 
192;  time  limit  for  preparation 
of,  197;  not  reaching  standard, 
201. 

Agencies,  special,  work  through, 
190;  superior  to  mercantile 
agencies,  190;  promptitude  of, 
198;  conceded  special  advan- 
tages, 198. 

Agricultural,  advantages  of  a  rail- 
road, 59;  domain,  60. 

Aldrich,  Wilbur,  6,  10,  108. 

American  Bankers'  Association, 
127. 

"American  Commonwealth,"  78. 

"American  Government,"  by  B. 
A.  Hinsdale,  301. 

American  railroads,  60. 

"An  Inquiry  into  the  Nature  and 
Effects  of  the  Paper  Credit  of 
Great  Britain,"  8. 

"An  Introduction  to  the  Consti- 
tutional Law  of  the  United 
States,"  by  John  Norton  Porae- 
roy,  321,  322. 

Annual  license,  158. 

Anti-Federalists,  political  element, 
306;  predisposed  to  limit  scope 
of  Federal  compact,  306. 

Appeals,  under  bankiiiptcy  act  of 
1841,  304;  under  bankruptcy 
act  of  1867,  304. 

Articles  of  Confederation,  ex- 
perience with,  321. 

343 


}44 


CREDIT  AND  ITS  USES 


Assets,  must  be  accurately  ap- 
praised, 227;  composition  of, 
understood.  227;  should  be  a 
real  help  to  the  business,  228; 
effect  upon  paying  qualities  of, 
228;  actual  value  only  com- 
puted, 228;  nature  of,  228;  sub- 
ject to  considerable  scaling, 
329. 

Assignees  in  bankruptcy,  under 
act  of  1867,  304. 

Assigrunent,  administration  of  an, 
309. 

Attorneys,  credit  information  se- 
cured through,  163;  excellent 
medium  for  credit  information, 
163,  164;  giving  credit  informa- 
tion without  charge,  105;  lists  of 
attorneys,  165,  166,  286;  reci- 
procity policy  not  beneficial  to, 
165,  166;  indifferent  as  to  serv- 
ice, 165;  dissatisfaction  of  busi- 
ness men  with  reports  of,  165; 
not  a  great  deal  of  value  placed 
on  reports  of,  165;  criticism  of 
attorneys'  reports,  166;  fee 
accompanying    request   for   re- 

{)orts,  166;  elimination  of  card 
ists  of,  169;  under  contract  to 
furnish  credit  information,  169; 
compensation  for  reports  of, 
169;  preparation  of  reports  by, 
169;  opinions  of  credit  men  on 
reports  of,  170,  171;  superior 
quality  of  credit  data  acquired 
by  some,  172;  special  reports  by, 
189;  used  to  corroborate  mer- 
cantile agency  reports,  197; 
drafts  handed  to,  278;  as  col- 
lectors, 284;  methods  in  collect- 
ing, 285;  publicity  attached  to, 
285;  expense  of  using,  285; 
character  of,  286;  capacity  of, 
286;  difficulty  of  determining 
standing  of,  286;  bonded,  286; 
comparison  with  collection  agen- 
cies, 287;  as  personal  counsel, 
287,  288;  business  from  collec- 
tion agencies,  289;  fees  of,  289; 
credit  msurance  and,  331,  332. 
"At  Wholesale,"  lecture  by  A.  C. 
Bartlett,  223. 


Babylon,  customs  prevalent  in,  6. 

Bagehot,  Walter,  9,  12,  13,  19,  41, 
46,  102, 103, 113. 

Balance  sheet,  determining  ac- 
ceptability of  a  bond,  62. 

Bank,  providing  customers  with 
permanent  capital,  36;  must  pay, 
36;  credits,  86;  credit,  113; 
should  secure  a  statement  from 
customer,  125;  standing  in  the 
community,  133;  balance,  137; 
customers  of,  140. 

Bankers,  their  services  in  public 
matters,  39;  tnistres  for  funds, 
etc.  46;  responsibility  of,  46; 
insisting  upon  insurance,  130. 

Banking,  sound,  35;  spirit  of,  36; 
reprehensible,  3G;  early  history 
of,  38;  difference  between,  and 
commerce,  46;  should  be  less 
risk  than  in  commerce,  46;  per- 
centage of  profits  smaller  than 
in  commerce,  46;  vitality  of,  49; 
most  powerful  agency  in  com- 
mercial structure,  174;  qualifica- 
tions for,  338. 

Banking  community,  power  of, 
37;  regulating  affairs  of  the 
world,  68;  has  not  recognized  the 
credit  department,  121. 

Banking  credit,  mercantile  credit 
and,  12;  highest  form  of  credit, 
35;  relation  of,  to  commerce,  41; 
quality  of  collateral  in,  46; 
credit  investigations  in,  86;  lack 
of  educational  methods  in,  88; 
note  broker  in.  111;  favoritism 
in,  138. 

Bank  of  Amsterdam,  7. 

Bank  of  Genoa,  39. 

Bank  notes,  use  of,  19,  38. 

Bank  references,  not  of  a  great 
deal  of  value,  172;  certain  in- 
formation not  disclosable,  172; 
credit  man  on,  174,  175;  mis- 
conception of,  by  credit  men, 
174. 

Bankrupt,  title  an  opprobrious 
one,  309;  well-disposed,  315; 
may  receive  discharge,  316;  dis- 
charge of,  332;  sale,  333. 

Bankruptcy,  men  saved  from,  332. 


INDEX 


345 


"Bankruptcy  a  Commercial  Regu- 
lation,' article  on,  James  M. 
Olmstead,  299. 

Bankruptcy  Act  of  1898,  The 
National,  relation  of  books  of 
account  to,  182;  preference  as  to 
rent  not  enforceable,  238;  credit 
man's  familiarity  with,  261; 
range  of  interpretation  of,  262; 
superseded  the  State  system, 
290;  making  for  equality,  290; 
aims  to  reach  administration  by 
creditors,  291;  expense  attend- 
ing, 291;  adjustments  through 
compositions,  291;  suspending 
State  statutes,  300;  referees  and 
trustees  under,  304,  317;  case 
under,  must  be  of  public  rec- 
ord, 309;  strong  point  in  its 
favor,  309;  passage  of,  310; 
enacted  after  prolonged  strug- 
gle, 310;  doubt  in  Congress  as 
to  wisdom  of,  311;  hailed  as 
progressive  step,  311;  not  con- 
sidered perfect  measure,  311; 
compromise  between  different 
forces,  311;  best-thought-out 
legislation,  311;  range  of  its 
operations,  311;  ease  with  which 
references  may  be  made,  311; 
administration  of,  311;  repeal 
measures  and  amendments,  313; 
different  divisions  of,  313;  aims 
to  reach  every  contingency  of 
bankruptcy  administration,  313; 
marked  departure  in,  313;  acts 
of,  314;  insolvency  defined,  314; 
more  difficult  to  place  in  bank- 
ruptcy under,  314;  who  may  be; 
come  banknipts  under,  314; 
compositions  permitted,  3ir); 
discharge  feature  explained,  316 ; 
strongest  merit  of,  317;  great 
powers  of  creditors  under,  317; 
advantage  over  State  procedure, 
318;  meetings  of  creditors,  318; 
principal  advantages  of,  320,321. 

Bankruptcy  Law,  adjustments 
under,  298;  disposition  of  na- 
tions toward,  298;  first  English, 
299;  in  England,  299;  first  in 
United   States,   and  scope   of, 


301,  302;  repeal  of  first  law, 
302;  American,  303;  demand  for, 
310;  interests  demanding,  310; 
opposed  to  passage  of,  31(;»;  com- 
prehensive, 311;  impossible  to 
devise  acceptable,  312. 

Bankruptcy  laws,  presupposed 
guilty  knowledge  of,  298;  prin- 
ciples based  on,  298,  299;  pres- 
ent purpose  of,  299;  of  mediaeval 
origin,  299;  outgrowth  of  com- 
mercial system,  299;  necessity 
of  commercial  system,  299;  in 
force  in  all  great  nations  of 
Europe,  299;  adoption  of,  299; 
power  of  Congress  to  establish, 
300;  relation  of,  to  credit  sj's- 
tem,  300;  of  ISOO,  1841,  1867, 
300;  short  life  of,  300;  absence 
of,  300;  bread-money  provisions 
of,  302;  Law  of  1841,  303;  Act  of 
1807,  304;  Act  of  June  22,  1874, 
305;  expenses  of  administration 
under  Act  of  1867,  30r);  repeal 
of  Act  of  1867,  305,  310;  patron- 
age and  op(M-ation  of,  307; 
ground  of  objection  to.  308;  dis- 
favor with  which  regarded,  309; 
greatest  evil,  in  absence  of,  3KS; 
in  earlier  functions  were  credi- 
tors' laws,  320;  broadening  the 
scope  of,  320. 

Bankruptcy  legislation,  develop- 
ments of,  298,  303;  in  I'nited 
States,  299;  duty  of  Congress 
in  respect  to,  300;  exemptions 
under,  302;  first  not  satisfactory, 
303;  demand  for,  303;  efforts  to 
secure,  304;  Thomas  A.  Jenckes 
and,  304;  had  not  taken  a  per- 
manent hold,  305,  306;  not  re- 
garded as  necessarj'  element, 
306;  beginning  of  permanent, 
311;  best  throughout,  311;  all- 
time,  opponents  of,  311;  marked 
departure  in,  313. 

Bankrupts,  under  old  English 
laws,  301,  309;  misfortunes 
unduly  exploited,  308;  treated 
with  great  severity,  309;  wear 
garb  to  advertise  disgrace,  309; 
under  Act  of  189S,  314. 


346 


CREDIT  AND  ITS  USES 


Banks,  definition  of,  37;  power  of, 
37,  38;  manufacturers  of,  38; 
classes,  38;  politicians  and,  38, 
39;  function  of,  39;  serving  to 
expand  credit,  40;  trustees  for 
funds,  etc.,  46;  responsibility  of, 
46;  relations  of,  with  note 
brokers.  111;  lending  on  book 
credits,  115;  determination  of, 
profit  in,  122;  acting  as  investing 
medium,  123;  policy  of  asking 
for  statements  from  customers, 
127;  customers  of,  140;  securing 
loans,  141;  have  no  information 
to  give,  173;  private  character 
of  relations  with  customers,  173; 
consulting  papers  and  periodi- 
cals, for  credit  information,  260; 
handling  collection  drafts,  279. 

Barclay,  Geo.  R.,  article  on  fire 
insurance,  248. 

Bartlett,  A.  C,  lecture  on  "At 
Wholesale,"  223;  offers  excellent 
groundwork  for  good  credit,.223. 

Beef  Trust,  92. 

Biggs,  Chas.  test  of  rent  value 
proposed  by,  237,  238. 

Bills,  instruments  of  credit,  43,  45. 

Bills  of  exchange,  19,  20,  23,  42, 
105;  chief  functions  of,  104, 107. 

Bills  of  lading,  42. 

Bills  of  sale,  318. 

Black  Friday,  305. 

Book  credits,  43,  106,  107,  113, 
114;  as  collateral  for  loans,  115; 
concerns  dealing  in,  116. 

Books  of  account,  182. 

Boom-town,  56. 

Bonded  lists,  of  attorneys,  286; 
use  of,  286;  guarantee  of,  286. 

Bonds,  credit  represented  by,  49; 
State,  54;  municipal,  54;  rail- 
road, 54,  57,  58;  municipal 
street-car  line,  54,  64;  water- 
works, 54;  of  certain  govern- 
ments, 73. 

Bradstreet  Company,  The,  ratings 
of,  146;  value  of  service,  191; 
foundation  of,  193;  organized  by 
John  M.  Bradstreet,  193;  incor- 
porated as,  194;  reputation  for 
soHdity,  194;  statistics  of,  225; 


number  of  people  in  business  re* 
ported  by,  220. 

Bradstreet,  John  M.,  193. 

Bradstreet,  Henrj',  193. 

Bradstreet,  J.  M.,  &  Co.,  193. 

"Bradstreet's  Improved  Mercan- 
tile Agency,"  193. 

Bradstreet  Press,  193. 

Bryan,  Clark  W.,  193. 

Bryce,  James,  78. 

Building  and  loan  associations,  26. 

Bullock,  C.  J.,  11,  219. 

Business  education  and  commer- 
cial banking  methods,  128. 

Business  literature  department  of 
National  Association  of  Credit 
Men,  336. 

Call  loans,  134. 

Canada,  failures  in,  225. 

Cannon,  James  G.,  83,  84,  86,  89, 
94,  254. 

Capability,  credit  granted  on,  220; 
basis  of  great  fortune,  221. 

Capacity,  an  element  of  credit,  84, 
110,  219,  221;  defined,  220; 
quality  on  which  business  de- 
pends, 222;  gives  material  life, 
223;  second  only  to  character, 
223;  place  in  credit,  226,  271; 
trusting  because  of,  226;  help  in 
developing  business  272;  of  man 
who  has  failed,  294. 

Capital,  hoarding  of,  21,  51;  credit 
employing  more  productively, 
25;  concentrated,  20;  desire  of 
those  who  seek,  27;  permanent, 
36;  unemployed,  51;  should  be 
invested,  51,  53;  effects  of  non- 
employment  of,  52;  used  for 
war  purposes,  70;  interest  on, 
90;  loss  of  interest  on,  90;  avail- 
able, 101;  trading  on  borrowed, 
103;  confining  to  own,  discour- 
aged, 103;  supplied  through 
book  credits,  114;  an  element  of 
credit,  219;  defined,  220;  in 
credit  economy,  221-226;  dis- 
position to  overestimate  im- 
portance of,  223;  must  have 
capacity  behind  it,  223;  repre- 
sents, 224;  when  not  a  deter- 


INDEX 


347 


mining  factor,  224;  when  neces- 
sary, 224;  lack  of,  224;  turning 
into  different  channels,  228, 
231;  active,  229;  effect  of  im- 
paired, 271. 

Capital  credit,  division  of  credit, 
49;  differs  from  banking  credit, 
49;  arises  from,  51. 

Capitalization,  basis  of,  65;  over, 
65;  at  reproduction  value,  66. 

Carey,  Henry  C,  9,  18,  27. 

Cash  basis,  doing  business  on,  105, 
106. 

Certified  public  accountant,  veri- 
fication of  books  by,  132. 

Character,  84,  85,  93,  94,  103, 
134;  an  element  of  credit,  219, 
221,  222,  271;  defined,  220; 
credit  granted  on,  220,  226; 
basis  of  great  fortunes,  221;  no 
right  to  credit  without,  222; 
some  claim  not  indispensable, 
223;  absence  of,  223. 

Checks,  19,  20,  23,  42,  43. 

"  Chicago  Exposition,"  332. 

Circulating  medium,  20. 

Civilization,  progressive,  68;  in- 
fluence of,  99;  progress  of,  339. 

Civil  War,  77,  305. 

Clark,  Charles  Finney,  president  of 
the  Bradstreet  Company,  194; 
his  work,  194. 

Clearing  houses,  18. 

Cleveland,  Frederick  A.,  10. 

Cleveland,  Grover,  77,  78. 

Clews,  Henry,  128. 

Collections,  affecting  safety  of 
business,  87;  interesting  duty  of 
credit  man,  263;  unless  made  in 
full,  263;  success  of  business  de- 
termined by  character  of,  264; 
advantage  of  prompt  collec- 
tions, 264;  terms  and  discounts 
determined  by,  264;  character 
of  accounts  affecting,  265; 
prompt  action  necessary,  265; 
systematic  methods  in,  266, 
267;  card  indices  used  for,  266; 
influence  of  tickler  systems  on, 
266;  improvements  in  methods 
in,  267;  tickler  system  plan, 
267,    268;    examinmg   ledgers, 


268;  discussing  with  salesmen, 
268;  methods  for  managing  dis- 
cussed, 268,  276,  277,  278;  hesi- 
tation by  credit  man,  269; 
causes  for  dilatory  payments, 
270;  too  rigid  application  of 
systems  for,  274;  a  system  of, 
275,  277,  278;  difference  in 
treatment  of,  275. 

Collection  agencies,  utilizing 
drafts,  278,  280;  work  of,  279, 
288;  draft  system,  279;  harm  to 
merchant  by  drafts  of,  279;  col- 
lection letters  of,  281;  collec- 
tions forwarded  through,  287; 
comparison  of,  with  attorneys, 
287;  supposed  advantages  of, 
288;  expert  knowledge  of,  289; 
giving  attorneys  busmess,  289; 
reports  from,  290. 

Collection  bureaus,  collection  let- 
ters used  by,  282. 

Collection  letters,  description  of, 
281;  series  of,  282;  impression 
made  by,  282;  concerns  doing 
business  in,  282;  sale  and  use 
of,  283;  usually  mark  severance 
of  business  relations,  283;  criti- 
cisms of,  283,  284;  when  impos- 
sible to  collect  by,  284. 

Colwell,  Stephen,  16. 

Commerce,  requirements  of,  17, 
18,  19;  influence  on  civilization, 
35;  relation  to  banking,  42; 
credit  system  in,  99;  source  of 
wealth,  102;  facts  of,  154;  effect 
of  failures  upon,  232;  spread  of, 
309;  fortuitous  losses  of,  324. 

Commercial  credit,  defined,  8;  ele- 
ments of,  84;  lack  of  educational 
methods  in,  88;  intricacies  of, 
95;  field  of,  99;  operations  of, 
99,  104;  channels  of,  100;  great 
pillar  of  the  credit  structure, 
102;  brings  into  being  instru- 
ments of  credit,  102;  hard  and 
fast  rule  for,  105;  influence  upon 
the  tendencies  of  the  people, 
108;  bankable  paper  arising 
from,  142;  in  a  new  community, 
194. 

Commercial  crises,  28,  29. 


348 


CREDIT  AND  ITS  USES 


Commercial  National  Bank  of 
Chicago,  196. 

Commercial  rating,  44. 

Commission  houses,  advancing  on 
book-credits,  115;  practically 
become  bankers,  116. 

Common  carriers,  57. 

Common-law  assignment,  adjust- 
ments under,  298. 

Company  .stores,  92;  credit  given 
by,  92;  credit  "enjoyed  at,  '  93; 
prices  charged  in,  93. 

Comparative  statement  forms, 
used  by  banks,  140, 143;  form  of, 
140;  advantages  of,  140,  248, 
249;  a  banking  custom,  249; 
opinions  of  credit  men  on,  249; 
reason  why  not  used  in  comi- 
mcrcial  credit,  249;  loss  of  time 
involved  in  using,  250. 

Competition,  stnigglcs  of,  87. 

Competitive  system,  108;  best  re- 
sults in  new  localities,  109. 

Compositions,  adjustments 

through,  291,  among  best  fea- 
tures of  Bankruptcy  Act  of  1898, 
315;  enforceable  by  court,  315; 
essentially  humane,  315;  may  be 
set  aside,  315;  creditor  before 
signing,  317. 

Confidence,  basis  of  modem  busi- 
ness, 219;  must  be  founded  on 
substantial  elements,  219;  basis 
of  credit,  219;  based  on  char- 
acter, capacity,  and  capital,  219. 

Congress,  power  to  establish  bank- 
ruptcy laws,  300,  301,  315;  duty 
in  respect  to  bankruptcy  legis- 
lation, 300;  treatment  of  cred- 
itors by,  318,  321. 

Conrad,  Johannes,  22,  24,  25,  27. 

Constitution,  The,  defining  rights 
and  duties,  79;  adoption  of,  306; 
provision  on  bankruptcy  laws, 
300;  phraseology  of,  on  bank- 
ruptcy laws,  301;  uniformity  re- 
quired by,  315;  experience  with, 
321. 

"Constitutional  Limitations,"  by 
Thomas  M.  Cooley,  301. 

Consumer,  unproductive,  30; 
credit  secured  by,  82;  takes  ad- 


vantage of  dealer's  fear,  87; 
must  recompense  dealer,  90; 
gratifying  his  wants,  91;  rau.st 
pay  advance  in  price,  91;  unit 
of  the  multitude,  100;  added 
cost  to,  324,  330. 

Consumptive  credit,  83. 

Continental  statutes,  313. 

Contract,  influence  of,  297;  debtors 
violation  of,  298. 

Cooley,  Thomas  M.,  right  of  the 
States  to  legislate  on  bank- 
niptcies,  301. 

Cooperative  bureaus,  88. 

Cooperative  methods,  outgrowth 
of  credit  information  system, 
206;  most  successful  work  in, 
213. 

Corporate  credit,  54. 

Correspondence,  not  as  effectual 
as  oral  interview,  154;  by  the 
credit  man,  257;  faults  in,  258; 
the  end  desired  in,  258;  in 
making  collections,  276. 

Cost  of  living,  89. 

Courses  in  Commerce,  study  of 
credit  and,  338;  scoffing  at,  339. 

Courts,  institution  of,  298;  cir- 
cuit, 304;  State,  administration 
of  failed  estates,  307;  State,  dis- 
pensing patronage,  307;  United 
States,  patronage  transferred  to, 
307;  State,  deprived  of  patron- 
age, 307;  United  States,  element 
opposed  to  extending  power  of, 
308. 

Credit,  those  affected  by,  3;  money 
and,  3;  as  a  science,  5;  hardly  an 
exact  science,  5;  principles  of, 
6,7,  11,  152;  world's  experience 
with,  6;  defined,  6,  8,  9,  10,  11; 
origin  of,  6,  7;  laws  affecting,  7; 
system  of,  7;  functions  of,  7,  21, 
91;  theory  of,  7,  14,  17,  83; 
tangible  element  of,  7;  intan- 
gible element  of,  8;  mercantile,  8, 
12;  estimates  of,  11;  confidence 
as  an  element  of,  12,  18,  51,  152; 
cardinal  questions,  13;  legal 
environment  of,  13;  funda- 
mental precepts,  17;  backward 
races  do  not  use,  18;  earliest 


INDEX 


349 


forms  of,  18;  as  a  substitute  for 
money,  19;  as  a  creator  of  pur- 
chasing power,  20,  89;  means  of 
production  not  increased  by,  20; 
purchasing  power  of,  21;  ad- 
vantages of,  22;  taking  the  place 
of  gold  and  silver,  24;  employing 
capital  more  productively,  25; 
benefits  conferred  upon  laborers, 
etc.,  25;  inculcates  saving  pro- 
pensities, 26;  abuses  of,  28,  69; 
used  to  create  a  monopoly,  28, 
30;  limits  of,  30;  standard  of,  30; 
given  to  \mproductive  dealers 
a  detriment,  30;  highest  form 
of,  35;  banks  dispensers  of,  35; 
false  systems  of,  36;  good  bank- 
ing, 36;  expansion  of,  40;  re- 
demption of,  40;  practical  phase 
of,  47;  determining  factor,  48; 
commerce  and  finance,  depend- 
ent on,  50; of  the  land, 55; stand- 
ard of,  58;  as  a  great  enabling  in- 
fluence, 68;  sensitiveness  of,  78; 
of  the  States,  79;  most  popular 
form  of,  82;  basest  form  of,  83; 
dynamics  of,  84;  lack  of  proper 
use  of,  84;  too  great  liberality  in 
extending,  86;  without  reliable 
knowledge,  87;  withholding  of, 
89;  effect  of,  on  prices,  89, 91;  re- 
sorted to  by  the  humblest,  90; 
nature  of,  91;  evils  of,  92;  pro- 
priety of  purchases  made  on, 
94, 95;  withdrawal  of,  95;  offered 
to  induce  business,  97;  medium 
through  which  goods  are  moved, 
100;  constant  use  of,  101;  in- 
dispensable in  commercial  life, 
101;  capital  to  producer,  manu- 
facturer, etc.,  101;  use  or  enjoy- 
ment to  individuals,  101;  trend 
of  business  toward,  103;  un- 
worthy persons  securing,  103; 
causes  same  circulation  as 
money,  105;  circulating  medium, 
105;  in  new  settlements,  109; 
time  Hmit  in,  110.  113;  prompt 
settlement  indispensable  to 
good,  113;  system  in,  121; 
means  a  risk,  150,  152;  a  great 
tradition,   131;  changing  char- 


acter of,  151;  element  of  futurity 
in,  152;  hard  and  fast  rules  in, 
152;  new  lines  of,  153;  treat- 
ment by  salesmen,  163;  not 
extending  reasonable  lines  of, 
172;  contraction  of,  172;  con- 
fidence, basis  of,  219;  judge  of, 
224;  ideal  credit  risk,  227;  un- 
duly restricting,  231  ;  fire  in- 
surance as  a  protection  to,  247; 
.stabilitv  of,  322;  certamty  of 
lo.sses  from,  323,  324;  type  of 
ability  necessaiy  in,  323;  ele- 
ment of  hazard  in,  325;  insur- 
ance of,  331 ;  recklessness  in  ex- 
tension of,  331;  organized  efforts 
for  improvement  of,  334;  stu- 
dent of,  339. 

"Credit,"  10,  11. 

Credit  associations,  policy  of,  in 
clearing  information,  207;  nu- 
cleus of  natural  movement, 
335;  movement  a  progressive 
one,  335;  greatest  success  of, 
336;  educational  center,  336; 
credit  literature  developed  by, 
336;  addres.ses  at  meetings  of, 
336;  subjects  of  addresses  at 
meetings  of,  337. 

Credit  bureaus,  most  desirable 
means  of  acquiring  credit  in- 
formation, 191;  held  in  high 
esteem,  206;  houses  object  to  be- 
longing to,  211;  distributing  in- 
formation, 211;  work  of,  212;  ex- 
pense of  conducting,  small,  213; 
organized  by  business  men,  214; 
capitalization  of,  214;  service 
of,  voluntary,  214;  formed  by 
branches  of  National  As.socia- 
tion  of  Credit  Men,  214;  must 
be  established  throughovit  the 
country,  215;  in  existence  num- 
ber of  years,  335. 

Credit  cooperation,  methods  con- 
stituting, 206;  employed  by  or- 
ganizations, 206;  lack  of  unifor- 
mitv  in  methods  of,  206;  nieth- 
ods'employed  in,  207,  208,  210. 

"Credit,  Credit  Man,  and  Cred- 
itor," paper  by  James.  G.  Can- 
non, 254. 


350 


CREDIT  AND  ITS  USES 


Credit  department,  The,  in  the 
bank,  86;  in  banking  credit,  121, 
140,  146;  an  essential  adjunct, 
121;  objections  to,  in  banks,  121; 
what  should  represent,  123;  op- 
erations of,  124;  use  of  forms  in, 
124;  regulator  of  the  whole 
mechanism,  128;  revision  of 
bank's  credit  reports,  139; 
broadening  in  banking,  146; 
division  of  industries  and  call- 
ings in  banking,  146,  148,  149; 
outline  of  work  of,  150;  keeping 
card-indexed  list  of  attorneys, 
166,  287;  present  demands  of, 
201;  designed  to  prevent  losses, 
263;  handing  accounts  to  at- 
torneys, 285;  informed  of  stand- 
ing of  attorneys,  286. 

Credit  department  methods,  com- 
mittee on, 178. 

Credit-giving,  an  extremely  deli- 
cate task,  151;  no  definite 
policy  in,  157. 

Credit  information,  obtained 
through  correspondence,  133; 
sources  of,  150;  means  of  ac- 
quiring, 150;  larger  volume  of, 
151;  credit  man  must  consult 
all  sources  of,  152;  every  class  of 
views  must  be  noted,  152;  oldest 
sources  of,  153;  must  be  given 
thorough  attention,  158;  proper 
responsibility  for,  among  sales- 
men, 162;  secured  by  attorneys, 
163;  services  of  attorneys  in  the 
main  satisfactory,  164;  should 
be  paid  for,  166;  attorneys  under 
contract  to  furnish,  169;  when 
services  of  attorney  necessary, 
170;  freedom  in  the  interchange 
of,  180;  oral  investigations,  185; 
mercantile  agency  and,  190;  a 
credit  clearance  system,  204; 
aim  of,  205;  volume  of,  relative- 
ly limited,  205;  reason  why 
necessary,  205;  organizations 
acting  as  mediums  for,  206,  333; 
great  variety  of  systems  of,  2(Xj; 
best  results  of,  in  certain  trade, 
206;  methods  employed  in  clear- 
ance  of,   207,  208,   210;   com- 


panies doing  business  in,  212; 
analysis  of,  220;  elements  of 
credit  and,  220;  papers  and 
periodicals  as  sources  of,  259; 
regarding  bad  or  doubtful  ac- 
counts, 294;  credit  association 
movement  and,  336. 

Credit  insurance,  to  protect  suf- 
ferers from  credit  losses,  .324; 
plan  on  which  operated,  325; 
degree  of  probability  in,"  326; 
premiums  have  trebled,  326; 
an  experiment  solely,  326;  re- 
imbursing an  "abnonnal  loss" 
only,  326;  requirement  as  to 
"own"  loss,  326,  327;  argu- 
ments for  and  against  "own 
loss  theory,"  327,  328;  carrying, 
as  practiced,  328;  policy  of  com- 
pany to  increase  "own"  loss, 
328;  feasibility  of,  328;  relation 
of,  to  fire  insurance,  329;  cost  of, 
330;  economic  utility  of,  330; 
right  name  of,  330;  reducing  the 
cost  of,  331;  recouping  through, 
331;  those  selling,  331;  saving 
from  doubtful  and  failed  ac- 
counts in,  331;  control  of 
accounts  in,  331;  weakness  of 
system,  331;  purpose  of,  should 
be,  332;  legitimate  function  of, 
332;  real  system  of,  332;  in- 
terest of  companies,  333;  prin- 
ciples on  which  it  should  rest, 
333;  a  much-discussed  subject, 
333;  phraseology  of  policies, 
333;  founded  on  scientific  bases, 
333;  safeguard  to  credit-giving, 
333;  stimulus  to  commerce,  333. 

Credit  interchange,  closer  relation- 
ship between  mercantile  in- 
terests and  banks  on,  172;  dif- 
fusion of  great  mass  of  credit 
information,  173;  among  bank- 
ers, 176;  principle  of.  180; 
based  on  reciprocity,  202;  sig- 
nificant development  of,  203; 
defined,  203;  acquired  from 
people  in  business,  203;  great 
benefits  of,  204;  some  fail  to 
co5perate  in,  204;  weeding  out 
imdesirable     customers,     204; 


INDEX 


351 


means  of  detecting  fraud,  204, 
205;  called  into  being  by,  204; 
candor  essential  to,  208;  efforts 
directed  to,  212;  spreading  the 
doctrine  of,  212;  success  of  idea 
depends  upon,  213;  question  of 
expense  affecting,  214;  depends 
upon  universal  support,  214; 
system  in  its  infancy,  214; 
national  bureau,  214,  215. 

Credit  instruments,  6,  12,  19,  42, 
43;  102,  106. 

Credit  investigations,  omission  to 
engage  in,  86;  lack  of  facilities 
for  making,  87;  absence  of 
knowledge  on  part  of  dealers,  87 ; 
proper,  88;  results  of,  preserved, 
294. 

Credit  investigator,  apprentice 
period,  185;  framing  own  ques- 
tions, 186;  interested  and  watch- 
ful, 186;  relation  to  commerce, 
186;  relation  to  traveling  credit 
representative,  187. 

"Credit — Its  Meaning  and  Mo- 
ment," 193. 

"Credit  Lines  and  Limitations," 
method  of  deciding,  239;  ran- 
dom reasoning  on,  239;  senti- 
ment in  favor  of,  239;  purpose 
of  institution,  239;  no  explicit 
rule  for,  239;  opinions  on,  239, 
240,  241,  242,  244;  inadvisable 
to  assign,  240,  244;  when  meas- 
ured by  requirements,  240; 
utility  not  recognized,  240;  diffi- 
culties in  depending  on,  242; 
basis  of,  242;  not  made  known  to 
customer,  241,  243;  usefulness 
where  an  account  is  overdue, 
243;  for  guidance  of  subordin- 
ates, 243;  changing  conditions 
affecting,  245;  mental  record  of, 
by  credit  man,  245;  impracti- 
cability of  respecting,  246. 

Credit  man,  disposition  to  idealize, 
124;  defined,  124;  of  a  bank,  124; 
a  lay  judge,  150;  must  consult 
all  sources  of  credit  information, 
152;  unwilling  to  be  influenced 
by  salesmen's  reports,  159;  com- 
bination of,  ana  salesman,  160; 


instructions  to  salesmen,  162; 
should  cultivate  close  relations 
with  the  salesman,  163;  use  of 
law  lists  by,  169;  contention 
that,  should  be  an  accountant, 
188;  agency  information  and, 
192;  must  analyze  information, 
219;  showing  his  confidence,  219; 
task  imposed  upon,  219;  burden 
lightened,  220;  insisting  on  list 
of  expenses,  234;  divorcing  the 
hiterest  of,  243;  bookkeeper 
helping,  243;  inquiry  as  to  fire 
insurance  carried,  247;  should 
advise  customers  regarding  fire 
insurance,  247,  248;  duties  of, 
251,  252;  broadening  his  ex- 
perience, 251;  consulting  sales- 
men, 252;  must  be  systematic, 
252;  habits,  252;  regulating 
duties,  252;  good  work  by,  253; 
the  tactful,  257;  dependent  on 
good  will  of  others,  257;  should 
meet  all  customers  if  possible, 
257;  conducting  correspondence, 
257,  258;  fallibility  of,  258; 
should  he  have  full  authority, 
258;  salesmen  appealing  from 
decision  of,  258;  acquiring  ex- 
perience, 258;  large  ideas  of, 
258;  exercising  influence  upon 
the,  259;  results  of  experience 
by,  259;  should  consult  financial 
pages  of  papers,  260;  as  a  stu- 
dent of  law,  260;  consulting  legal 
periodicals,  260;  should  not  oe 
his  own  lawyer,  260,  262;  should 
consult  lawyers  when  in  litiga- 
tion, 261;  published  legal  de- 
cisions and,  261;  assimilating 
State  collection  laws,  261;  in- 
teresting duties  of,  263;  not  al- 
ways a  good  collector,  263;  effect 
of  losses  on,  263;  misjudging 
character  of  accounts,  263; 
collections  question  constantly 
before  him,  265;  who  asks  for 
prompt  payment,  260;  use  of 
tickler  by,  266;  economizing 
time  and  labor,  268;  night  work 
by,  condemned,  269;  insisting 
upon  prompt  payment,  269, 270; 


352 


CREDIT  AND  ITS  USES 


should  investigate  causes  for 
slow  payments,  270;  affected  by 
sentiment,  272;  displaying  im- 
partiality, 272;  interviewing  de- 
linquent customers,  274;  undue 
pressure  on  delinquent  cus- 
tomers, 274;  a  system  of  collec- 
tions used  by  a,  275;  must  em- 
ploy systematized  methods,  275; 
collection  agencies  and  the,  288; 
giving  attention  to  bad  debts, 
288,  289,  290;  prescience  of, 
323;  objective  point  of,  323;  at- 
tempting to  prove  loss,  333; 
training  of,  338;  measuring  with 
correct  judgment,  339. 

"Credit  Man  and  His  Work,"  260. 

Credit  office  mechanics,  arrange- 
ment and  preservation  of  credit 
information,  253;  no  principle 
involved,  253;  least  possible 
labor  desirable,  253. 

Credit  organizations,  work  to  be 
done  by,  183;  agitating  pay 
ratings,  200;  movement  out- 
growth of,  334. 

Credit  reference  cards,  purpose  of, 
254;  exposition  of,  254,  255; 
sample  form  of,  255;  advantage 
of,  256;  not  much  used,  256; 
issued  by  National  Association 
of  Credit  Men,  256;  labor  of 
maintaining,  256;  used  for  col- 
lections, 266. 

Credit  standing,  of  applicants  for 
credit,  86;  giving  question  of, 
attention,  89. 

Credit  system,  the,  16,  17,  IS; 
soundness  of,  17;  fundamental 
precepts  of,  17;  weaknesses  of, 
28;  encourages  speculation,  29; 
evils  of,  86;  expansion  of,  103; 
great  advantage  of,  105;  rela- 
tion to  bankruptcy  laws,  300; 
credit  losses,  corollary  of,  323. 

Currency,  limit  of  volume  of,  101; 
circulates  among  consumers, 
101. 

Dating,  in  conunercial  transac- 
tions, 113;  defined,  114;  has 
become   a   right,    114;    led   to 


undue  anticipation  of  wants, 
114;  cause  of  considerable  loss, 
114. 

Debts,  national,  09;  fimded,  69, 
70;  permanent,  70;  results  of 
waste  and  extravagance,  80; 
small,  paid  in  cash,  101;  loss 
through  bad,  131. 

Denver  &  Rio  Grande  Railroad 
Company,  63. 

Department  stores,  88. 

Depreciation  in  the  value  of  goods, 
323. 

Discharges  in  bankruptcy  under 
Act  of  1841,  303;  ease  with 
which  secured,  312;  grounds  of 
opposition  to,  316;  classes  of 
debts  not  relieved  by,  316;  op- 
posing, 317. 

Discount  lines,  no  uniform  system 
of,  137;  permitted  in  banking, 
239;  no  definite  rule  for,  239. 

Douglass,  Benjamin,  193. 

Douglass,  B.  &  Co.,  193. 

Drafts  as  credit  instruments,  42, 
43. 

Drafts,  for  collection  purposes, 
when  made,  275;  some  mer- 
chants care  little  for,  276;  sys- 
tem of,  276;  may  afford  more 
evidence  of  debtors'  inability  to 
pay,  277;  practice  an  old  one, 
278;  when  regular  feature  of 
collections,  278;  when  unfriend- 
ly action,  278;  no  established 
rule  regarding,  278;  collection 
of  small  accounts  by,  278; 
handed  to  attorney.s,  278;  effect 
of  refusal  to  honor,  279,  281; 
original  system  of,  279;  paying 
for  collection  of,  279;  collection 
agency,  280;  when  impo.saible 
to  collect  through,  284. 

Dun,  Robert  Graham,  193. 

Dun,  R.  G.  &  Co.,  ratings  of.  146; 
value  of  service,  191;  origin  of 
mercantile  agency,  192,  193; 
reputation  for  solidity,  194; 
failures  reported  by,  328. 

Earning  power,  53,  55,  62,  65,  89, 
93. 


INDEX 


353 


Eckels,  James  H.,  opinion  on  mer- 
cantile agencies,  196. 

Economic  issues,  5. 

Economic  influences,  103. 

Economics,  played  too  small  a 
part,  339;  covers  the  status  of 
man  in  society,  339. 

Economy,  in  management,  233; 
feature  of  efficient  control,  233. 

Element  of  futurity,  152. 

Elements  of  credit,  character, 
capacity,  and  capital,  219;  not 
all  needed,  220. 

Elite  directories,  97. 

Ely,  Richard  T.,  8,  10,  22,  25,  27, 
37. 

Embezzlement,  28,  30. 

England,  banking  system  of,  38; 
national  debt  of,  69;  national 
supremacy  of  69;  Venezuela 
obligated  to  pay,  79;  bills  of 
exchange  in,  105;  bankniptcy 
laws  introduced  in,  299;  has 
had  thirty-eight  bankrupt  laws, 
299;  depredations  on  merchant 
marine,  302;  second  war  with, 
303. 

English  bankniptcy  law,  first,  299; 
friends  and  opponents  of,  299; 
principles  of,  299;  bread  money, 
302. 

English  schools,  13. 

Equipment,  effect  of,  on  securities, 
59;  character  of,  61. 

Europe,  credit  in,  108. 

Exchange,  characteristic  instru- 
ment of,  8;  present  system  of, 
24;  foreign,  24. 

Exemption  laws,  184. 

Exemptions,  under  bankruptcy 
laws,  302,  303,  304,  305,  315; 
regarded  with  disfavor  by  cred- 
itors, 315;  diversity  of,  315. 

Extension  of  time  when  safely 
conceded,  271. 

Extravagance,  causes  of,  28 
credit  system  responsible  for,  28 
exercise  of,  97;  flaunting,  97 
age  of,  98. 

Farwell,  J.  V.,  Co.,  attorneys'  list 
used  by,  287. 


Fawcett,  Mr?.  Millicent  Garrett,  9. 

Federal  Government,  subject  of 
bankruptcies  and,  301. 

Federalism,  type  of  statesmanship, 
306;  diff'erentiation  between, 
and  States'  Rights,  308. 

Federalists,  political  element, 
306. 

Fiat  money,  77. 

Finance,  State,  78. 

Fire,  losses  from,  324. 

Fire  insurance,  relation  of,  to 
credit,  246;  failure  to  carrj',  246; 
questions  by  credit  office,  247; 
solvency  of  companies  affecting 
credit,  247;  articles  published 
by  National  Association  of 
Credit  Men  on,  248;  article  by 
George  R.  Barclay  on,  248;  tend- 
ency of  rates  downward,  326; 
refining  process  in,  326;  credit 
insurance  and,  329;  payments 
by  companies  in  1904,  329; 
damaged  property  managed  by 
companies,  332. 

Foreign  territory,  acquisition  of, 
68. 

Forgan,  D.  R.,  52. 

Forms,  banking  credit  department, 
"account  opened,"  125,  126; 
statements,  128,  132,  133;  credit 
information  letters,  133,  135, 
136;  collateral  note,  139;  re- 
vision of  reports,  letters,  138, 
139,  142,  144;  comparative 
statement,  140;  statement  for 
use  by  banks,  141;  listing  bills 
receivable,  141,  143;  showing 
state  of  customer's  account,  145; 
card  for  customers  and  ratings, 
146,  147;  mercantile  credit  de- 
partment salesmen's  credit  in- 
formation blank  154,  155,  156, 
157,  158,  159,  170;  attorneys' 
report  blank,  167,  168,  169;  in- 
quiry forms,  178,  179;  state- 
ments, property,  182-  informa- 
tion bureau  inquiry  ticket,  208, 
209;  information  bureau  ex- 
perience forms,  210,  211,  212. 

Fourth  National  Bank  of  New 
York,  83. 


354 


CREDIT   AND   ITS  USEb 


France,  Venezuela  obligated  to 
pay,  79;  bankruptcy  laws  in- 
troduced in,  299. 

Franchise,  value  of,  62,  67. 

Franklin,  Benjamin,  285. 

Fraud,  causes  of,  28,  30. 

Freight,  transfers  of,  60. 

French,  F.  E.,  describes  use  of 
attorney's  list,  287;  opinion  of, 
289. 

French  schools,  13. 

"  Funds  and  Their  Uses,"  10. 

General  expenses,  defined,  233; 
itemized  list  of,  234. 

German  Cooperative  Credit 
Unions,  22,  25,  26. 

German  schools,  13. 

Germany,  Venezuela  obligated  to 
pay,  79. 

"Giving  and  Getting  Credit,"  11, 
192. 

Goddard,  Frederick  B.,  11,  192. 

Gold,  bills  of  exchange  and,  105; 
supply  of,  105. 

Gold  reserve,  redemptive  suffi- 
ciency of,  77. 

Government  ownership,  57. 

Greeks,  political  economy  and 
the,  3. 

Greenbacks,  source  of  great  solici- 
tude, 77. 

Hague  Tribunal,  79. 

Hallam,  Henry,  39. 

Halle,  22. 

Harvard  Law  Review,  vol.  xxv,  No. 

10,  299. 
Hayne,  Richard  Young,  favored 

national  bankruptcy  law,  307. 
Henry  VIII,  reign  of,  299. 
Hinsdale,  B.  A.,  on  meaning  of 

laws  on  bankruptcies,  301. 
Hotchkiss,  William  H.,  article  on 

"Two    Years    of    the    Federal 

Bankruptcy  Law,"  312. 

Incapacity,  cause  of  failures,  225. 
Incompetency,  cause  of  failures, 

225. 
Industrials,  defined,  64;  character 

of  certain,  66. 


"Individual  credits,"  83. 

Individual  or  personal  credit,  d^ 
fined,  82;  basest  form  of  credit, 
83;  foundation  of  all  credit,  83; 

Erimitive  origin  of,  83;  better 
asis  for,  84;  elements  of,  84; 
less  system  in,  85;  falsity  and 
unsoundness  of,  88;  difficulty 
of  getting  satisfactory  informa- 
tion, 89;  restrict  amount  of,  92; 
relation  to  labor  problem,  93; 
defects  of,  95;  vast  loss  in,  325. 

Insurable  risk  defined,  324. 

Insurance,  in  statement  form,  130; 
system  of,  324;  principles  of, 
324;  divisions  of  credit  subject 
to,  325;  susceptible  to  operations 
of,  328;  cost  of  sustaining,  328; 
necessary  elements  of  correct, 
329;  too  easily  making  use  of, 
331;  as  an  abstract  proposition, 
331. 

Illinois,  State  of,  322. 

Inquiry  forms,  description  of,  178, 
179;  in  great  demand,  180;  bring 
prompt  replies,  180;  reciprocity 
promment  part  in,  180;  accept- 
ance of  information  in,  181. 

Insolvency,  when  due  to  poor 
collection  service,  264 ;  mer- 
chants forced  into,  270, 280;  con- 
dition of,  defined,  305;  defined 
by  narrower  interpretation,  314; 
a  matter  of  gradual  develop- 
ment, 319. 

Insolvency  law,  estates  admin- 
istered under,  298;  adjustments 
under,  298;  if  same  in  every 
State,  321. 

Insolvent  estates,  administration 
of,  290;  cooperation  of  interests 
in  administering,  290;  winding 
up  of,  292. 

Interest,  advance  in  rate  of,  47; 
injustice  to  poor  man,  47;  aver- 
age rates  of,  50;  paying  capac- 
ity, 58;  steady,  67;  merchant's 
standing  determines  rate  of,  112; 
normal  and  abnormal,  116; 
charged  for  excess  time,  276. 

"Introduction  to  the  Study  of 
Economics,"  11,219. 


INDEX 


355 


Investments,  49,  51,  52,  53,  54, 56, 
57,58,59,66,81. 

Involuntary  bankruptcy,  petition 
in,  305;  provided  for  in  Act  of 
1898,  314. 

Irving,  Washington,  on  inventions 
of  paper  and  the  press,  336. 

Italy,  Venezuela  obligated  to  pay, 
79. 

Italian  cities,  banking  credit  in,  7. 

Italian  States,  bankruptcy  laws  in- 
troduced in,  299. 

Japanese,  attitude  of,  during 
Kusso-Japanese  War,  73;  bond 
issue  by  government,  73. 

Jenckes,  Thomas  A.,  champion  of 
bankruptcy  legislation,  304. 

Jenks,  Jeremiah  W.,  65. 

Judges,  political  system  of  select- 
ing, 308;  dispense  court  patron- 
age, 308. 

Judiciary  Committee,  of  House  of 
Representatives,  report  of,  300; 
of  Fifty-seventh  and  Fifty- 
eighth  Congresses,  313. 

Justinian,  legislation  of,  7. 

Kansas,  State  of,  321. 

Kentucky,  State  of,  322. 

Kline,  S.  J.,  opinion  on  rent,  235. 

"Lack  of  Capital,"  cause  of  fail- 
ures, 224;  percentage  of  failures 
due  to,  225;  difficult  to  deter- 
mine relation  of,  to  all  failures, 
225. 

Land,  "property  in,"  54;  mineral, 
59. 

Laughlin,  J.  Lawrence,  10,  11,  12. 

Law,  forms  of,  298;  substantive, 
313;  criminal  or  remedial,  313. 

Law  lists,  use  of,  by  credit  men, 
169;  prepared  by  responsible 
concerns,  169;  obviate  the  neces- 
sity of  card  lists,  169;  attorneys 
under  contract  to  furnish  credit 
information,  169. 

Laws,  rights  and  interests  of 
creditors  and  debtors  under, 
297;  to  be  administered  by  those 
competent  and  honest,  297. 


Ledger  experience,  credit  inter- 
change exchange  of,  203;  utiliza- 
tion, of  203;  most  sought  for  in- 
formation, 203. 

Ledger  information,  work  of 
special  agencies  in,  190. 

Legal  redress,  for  unpaid  or  failed 
accounts,  297;  character  of,  298; 
sought  through  bankruptcy 
laws,  298. 

Legislative,  sources,  57;  require- 
ment, 58;  appropriations,  70. 

Legislature,  sanction  of,  80. 

"Lombard  Street,"  9. 

Losses,  system  not  a  complete  bar 
to,  123;  avoidance  9f,  257,  323; 
due  to  lack  of  skill  in  managing 
accounts,  269;  attributable  to 
character  of  handling,  269; 
credit,  323,  325;  inevitable  re- 
sult of  credit,  323;  minimized 
through  efficient  management, 
323;  moderate  percentage  a 
certainty,  323;  probability  of, 
every  year,  324;  sufferers  from 
credit,  324;  in  individual  credit, 

325,  328;  due  to  dry  rot,  326; 
fire  and  marine,  326;   average, 

326,  327;  from  bad  debts,  328; 
"own"  and  abnormal,  328;  com- 
mercial interests  able  to  insure, 
330;  credit  insurance  should  be 
preventive  against,  332. 

Lowell,  John,  opinion  on  Bank- 
ruptcy Act  of  1867, 306. 
Luxury,  age  of,  98. 


Macleod,  Henry  Dunning,  6,  9, 
13,  14,  16,  29,  40,  54,  55,  82, 
101,  104. 

Maine,  Henry  Sumner,  on  univer- 
sality of  contract,  297. 

Management,  59,  61,  67. 

Manufacturing,  interests  and  utili- 
ties, 59,  60,  64. 

Marshall,  John,  Chief  Justice, 
Supreme  Court,  307. 

Massachusetts  Insolvency  Law  of 
1838,  303. 

Maturity  slips,  for  collection  pur« 
poses,  266. 


356 


CREDIT  AND  ITS  USES 


McAdow,  F.  H.,  opinion  on  rent, 
236,  237;  analysis  of  statements 
affecting  rents  by,  236. 

Means  of  production,  20. 

Memphis  Credit  Men's  Associa- 
tion, information  bureau  inquiiy 
ticket  used  by,  209. 

Mercantile  Agency,  The,  best 
known  fountain  of  credit  infor- 
mation, 190;  referred  to  as  in- 
dispensable element,  190;  not 
indispensable  to-day,  190;  in- 
formation of  a  secondary  char- 
acter, 190;  value  daily  becoming 
less,  191;  work  of,  191;  use  in 
corroborating  other  informa- 
tion, 192;  credit  men  misled  by, 
192;  origin,  192;  object  of,  192; 
Lewis  Tappan  and  first,  192; 
description  of  first,  193;  ex- 
tended by  Benjamin  Douglass, 
193;  made  rapid  progress,  193; 
scope  and  influence  of,  194. 

Mercantile  agencies,  classifying 
dealers,  85;  retail,  88;  coopera- 
tive, 88;  ratings  of,  142;  work  of, 
151,  172;  discrepancy  in  reports 
of,  183;  special  reports  by,  188; 
failure  to  extend  system  of,  191; 
estimating  value  of,  191;  failure 
to  develop  rival,  194;  strong  sen- 
timent in  favor  of,  194;  worthy 
of  much  praise,  194;  upbuilding 
commercial  structure,  194;  will- 
ingness to  extend  credit  regu- 
lated by,  195;  influence  of  in- 
calculable value,  195;  review  of 
trade  conditions  by,  195;  assist- 
ance to  business  men,  195; 
criticisms  of,  by  credit  men, 
195,  196;  reports  of,  deficient, 
196;  disapproval  of,  196;  de- 
marud  upon,  196;  delays  in  ser- 
vice, causes  of,  196;  "greater 
accuracy"  demanded  from,  197; 
prompt  service  explained,  197; 
generalization  in  reports,  197; 
condensation  of  data  necessary, 
197;  claimed  promptitude  of 
special  agencies  over,  198;  lack 
of  detail  in  regard  to  statements, 
198;   unwillingness  to  comply 


with  requests  of,  198;  hard  to 
induce  merchants  to  give  state- 
ments to,  198;  relation  to  com- 
mercial life,  199;  percentage  of 
statements  secured  by.  199;  re- 
porters lack  commercial  training, 
199;  pay-ratings,  200,  201;  ex- 
tinct, 200;  institution  of  bureau 
for  trade  information  by,  201, 
202;  closer  attention  to  essential 
elements  of  reports  by,  201; 
facilities  of,  202;  scope  of  in- 
formation, 203;  inability  to 
secure  trade  information,  203; 
should  have  some  accessory, 
205;  establishing  credit  coopera- 
tive bureaus,  213;  intimately 
associated  with  business  life, 
213;  statistics  of  losses  pub- 
lished by,  325. 

Merchandise,  finished,  unfinished, 
and  raw  material,  129;  reasons 
for  separating  into  classes,  129; 
accommodation,  131. 

Merchants'  Credit  Association,  of 
San  Francisco,  211;  "System  of 
Remarks  "  used  by,  211. 

Merchants'  protective  associations, 
in  existence  manjy  years,  291. 

Middle  Ages,  bankmg  in,  7. 

MiU,  John  Stuart,  4,  12,  13,  20,  21, 
25,  30,  90,  104. 

Minnesota  Bankers*  Association, 
128. 

Money,  caring  for,  37;  stock  of, 
37;  supply,  37;  represents,  41; 
fallacy  of  large  earning  capacitv, 
50;  fiat,  77;  gave  hberty,  108; 
great  want  of,  in  new  settle- 
ments, 109. 

"Money  and  Credit,"  6,  10. 

Montesquieu,  Charles  DeSecondat, 
41. 

Monopoly,  cessation  of,  62;  tobac- 
co, 74. 

Mortgages,  49,  54,  318. 

Municipal,  securities,  57,  81;  obli- 
gations, 80;  extravagance,  80; 
restrictions  on  borrowing,  80; 
government  nearer  to  the  peo* 
pie,  308. 

Murphy,  Daniel  B.,  90, 


INDEX 


357 


National  Association  of  Credit 
Men,  forms  approved  by,  154, 
169,  178;  card-indexed  list  of 
attorneys  suggested  by,  166; 
branches  of,  207,  214,  284;  arti- 
cles on  fire  insurance  published 
by,  248;  credit  reference  cards 
issued  by,  256;  organized  at  To- 
ledo, Ohio,  335;  successfully 
attempted  improvements,  335; 
objects  of,  335;  relation  of  aims 
to  World's  Mercantile  Congress, 
announcement  of,  335;  Business 
Literature  Department  of,  336; 
stimulated  interest  in  the  study 
of  credit,  338. 

Nebraska,  State  of,  321 . 

Necessaries  of  life,  credit  functions 
begin  with,  91;  under  Bankrupt- 
cy Act  of  1867,  304. 

New  York,  State  of,  legislation 
affecting  books  of  account,  182. 

New  York  City,  merchant  in,  322. 

North  American  Review,  April, 
1901,  312. 

Note  brokers,  functions  of.  111, 
112. 

Note  settlements,  disuse  of,  1 1 2. 

Note  shavers,  111. 

Notes,  23,  38,  43,  44,  45,  111,  112, 
113;  bank,  139. 

Notes  payable,  130. 

Notes  receivable,  129. 

"Objects  and  Possibilities  of  Cred- 
it Men's  Associations,  The,"  90. 

Oral  investigations,  results  se- 
cured through,  185;  confined  to, 
185;  methods  of  making,  185; 
consulting  personal  friends,  185; 
a  feature  of  credit  cooperation, 
206. 

"Outlines  of  Economics,"  10. 

Overbuying,  danger  of.  111;  a 
great  business  evil,  205;  to  avert 
results  of,  205. 

Overtrading,  28,  29. 

"Own"  loss,  defined,  326;  must 
first  pay,  326;  adding,  to  sell- 
ing price,  327,  330;  theory  a 
fallacious  one,  328;  policy  of 
company  to  increase,  328;  how 
24 


dispose  of  increased,  328;  de- 
fending principle  of,  329;  ac- 
counts included  in,  330;  cost  of 
credit  insurance  and,  330;  feasi- 
bility of  insuring,  330;  making 
somebody  else  pay,  330;  not  to 
be  confused  with  coinsurance, 
330. 

Panic,  causes  of,  29;  of  1837,  192, 
301;of  1873,  309. 

Paper,  "sign  of  the  value  of 
specie,"  41;  fictitious  and  ille- 
gitimate, 43,  44,  108;  real,  44; 
redeemable  and  irredeemable, 
73;  credit,  75;  single-name,  112, 
133;  commercial,  123;  carrying 
indorsers,  134. 

Paper  World  and  Manufacturer, 
193. 

Patronage,  official  and  judicial, 
307;  power  to  dispense,  307. 

Payment,  tardiness  in,  87,  269, 
270,  274;  prompt.  89,  95;  due, 
date  of,  91;  cash,  91;  slow,  how 
lroated,273;  moans  for  inducing, 
274;  impossible  to  make,  274. 

Personal  credit,  earliest  form  of 
credit,  18;  defined,  82. 

Personal  deficiencies,  185. 

Personal  qualities,  reckoned  as 
wealth,  21;  species  of  wealth, 
103. 

Personality,  railroad  management 
dependent  on,  60. 

Philadelphia,  merchant  in,  322. 

Phoenicia,  6;  customs  prevalent 
in,  6. 

Political  economy,  money  and 
credit  and,  3;  defined,  3,  5; 
changes  in,  3;  as  a  department 
of  state.sman.ship,  4;  neutral 
science,  4;  influence  of,  4;  inex- 
orable law  of,  31. 

"Political  Economy  for  Begin- 
ners," 9. 

Pomeroy,  John  Norton,  opinion  of, 
on  diversity  of  State  laws,  321, 
322. 

Post,  William.  222. 

Precious  metals,  stock  of,  23;  uae 
of,  in  the  arts,  24, 


358 


CREDIT  AND  ITS  USES 


Preferences,  by  insolvent  debtors, 
318,  319;  system  of,  318,  319; 
encouraged  by  State  laws,  318; 
methods  offspring  of,  319;  idea 
underlying,  319;  groundwork  of 
much  injustice,  319;  within  four 
months,  319;  during  probable 
term  of  insolvency,  319;  may  be 
voided,  319;  scope  of,  320. 

"Presidential  Problems,"  77. 

"Principles  of  Political  Economy," 
25. 

Probability  of  loss,  data  to  esti- 
mate scientifically,  325;  degree 
of,  333. 

"  Production,  Consumption,  and 
Distribution  of  Wealth,"  4;  re- 
lation of  credit  to,  5. 

"Production,  Distribution,  and 
Exchange  of  Wealth,"  4;  re- 
lation of  credit  to,  5. 

Production,  means  of,  20. 

Productive  arts,  72. 

Productive  capacity,  furthering, 
21;  augmented  by  use  of  capi- 
tal, 52;  repression  of,  72;  meth- 
ods of,  72. 

Productive  power,  capital  for  the 
promotion  of,  56. 

Productivity,  21;  assistance  of,  53. 

Profit,  in  economics,  28;  realizing 
49;  of  the  business,  50;  fair,  87 
volume  of,  88;  percentage  of,  97 
percentage    of,    justifying    in- 
terest paid,  116;  net,  130;  com- 
bined, 130. 

Profits,  gross,  130. 

Promissory  notes,  19,  42,  44,  104, 
105,  107,  111. 

Property,  "in  land,"  54;  real,  59; 
timber,  59;  credits  as,  300,  331; 
care  of,  331. 

Public  credit,  basis  of,  69;  im- 
pairment of,  71;  advanced  state 
of,  73;  paper  currency  and,  77; 
refers  to,  78. 

Public  debts,  healthy  sign,  71; 
ability  to  create,  leading  to  ex- 
travagance, 71;  money  so  used 
withdrawn  from  other  useful 
purposes,  72. 

Public  gambling,  57. 


Public-service  utilities.  54,  57,  6^ 

63. 
Public  works,  69,  70. 

Quick  assets,  defined,  228;  tend- 
ency to  turn  from,  231. 

Railroad,  termini,  59;  enterprises, 
60;  American,  60;  connectioiLs, 
60;  balance  sheet  of,  60;  bond, 
62;  securities,  64. 

Ray  Bill,  amending  Bankruptcy 
Act  of  1898,  313;  changed  by 
Senate,  313;  went  into  effect, 
313. 

Ray,  George  W.,  United  States 
Judge,  313. 

Real  estate,  54,  55;  oldest  form  of 
investment,  54;  enhancement  in, 
55;  adaptability  to  manufactur- 
ing purposes,  55;  boom  con- 
ditions, 56;  most  substantial 
fortune  in,  56. 

Referees  in  bankruptcy,  under 
Act  of  1898,  304,  317;  appointed 
by  United  States  Judges,  317; 
judicial  powers  of,  317;  must 
give  bonds,  317. 

References,  written,  common  prac- 
tice to  ask  for,  177;  consulting 
those  given  by  customer,  177; 
great  volume  of  correspondence 
on,  177;  use  of  forms,  177;  in- 
formation general  and  evasive, 
178;  printed  form  inexpedient, 
180;  work  of  answ^ering,  imposi- 
tion, 180;  character  of  house 
giving,  181. 

Registers  in  bankruptcy,  under 
Act  of  1867,  304. 

Reid,  Murdoch  &  Co.,  273. 

Rent,  question  in  property  state- 
ments as  to,  234;  little  discus- 
sion regarding,  234;  not  affected 
by  capital  employed,  234;  not 
affected  by  volume  of  business 
234;  based  upon  profits,  235 
opinions  upon,  235,  236,  237 
affected  by  location,  235;  ratio 
to  gross  expenses,  236;  percent- 
age to  allow  for,  236;  should  be 
left  to  judgment  of  merchant, 


INDEX 


359 


237;  preference  covering,  238; 
should  be  carefully  investigated, 
238. 

Retailers,  demands  of,  100. 

Revenues,  fluctuation  in,  70;  dan- 
ger of  surplus,  71;  deficit  in,  71. 

Rio  Grande  Western  Railway, 
63. 

Romans,  credit  used  by,  6,  7. 

Russo-Japanese  War,  funds  con- 
sumed in,  70. 

Sales,  annual,  130;  making  re- 
duction in,  230,  253,  265;  judi- 
cious increase  in,  230;  increasing 
each  year,  253,  254;  commonest 
forms  of  contract,  297;  inability 
to  make,  328. 

Salesmanship,  high  order  of  in- 
telligence required,  154. 

Salesmen,  credit  reports  by,  153; 
idea  of  utilizing,  153;  general 
nature  of  duties,  153;  oppor- 
tunities of,  153,  154;  place  in 
business  economy,  154;  students 
of  markets,  154;  rudimentary 
knowledge  required  in,  154,  158; 
business  adviser  of  customer, 
154;  blanks  used  by,  154;  ques- 
tions must  ask  customer,  157; 
powers  of  observation,  158;  con- 
sulting local  authorities,  158; 
credit  men  not  influenced  by 
reports  of,  159;  selfish  motives 
of,  159;  considerations  of,  160; 
subserving  interests  of  customer, 
160;  opinions  of  credit  men 
upon,  161,  162;  diff'erences  in 
temperament  between,  161; 
primal  motive  of  occupation, 
161;  failure  to  take  a  broad 
view  of  questions  affecting 
credit,  162;  credit  man's  instruc- 
tions to,  162;  aptitude  distinc- 
tive characteristic  of,  163;  ap- 
pealing from  decision  of  credit 
man,  258;  promoting  prompt 
payment  among  customers,  268; 
customer's  preference  for,  272. 

Sanger,  H.  H.,  article  on  "A  Sys- 
tem for  a  Bank's  Credit  Depart- 
ment," 260. 


Savings  Banks,  system  of,  26;  in- 
vestments by, 58. 

Say,  J.  B.,  4. 

Schultze,  Herr  (Schultze  -  De ' 
litzsch),  26. 

Science,  defined,  6. 

Science  of  economics,  defined,  3. 

Securities,  long  term,  55;  telegraph 
'  company,  54,  64;  telephone 
company,  54,  64;  gas  company, 
54, 64;  electric  lighting  company, 
54,  64;  general  industrial,  54, 
64;  national,  57;  State,  57,  81; 
municipal,  57,  81;  marketability 
of,  62;  railroad,  63;  advance- 
ment in  the  value  of,  75. 

Security,  character  of,  53;  prop- 
erty pledged  as,  63;  revenues 
pledged,  73;  customs  receipts 
mortgaged,  79. 

Service,  effect  upon  a  railroad,  62. 

Shares,  railroad,  54.  57;  municipal 
street-car  line,  .54;  bank,  54; 
trust  company,  54;  preferred 
and  common  stock,  57,  66. 

Simmons  Hardware  Co.,  instruc- 
tions to  traveling  salesmen  on 
fire  insurance,  248. 

Slow  or  fixed  assets,  defined,  229; 
to  what  extent  should  be  con- 
sidered, 229;  views  on,  229,  230; 
idea  of  illuminating,  230;  plan 
of  illumination,  230;  as  a  main- 
stay of  the  business,  231 ;  effect 
of  undue  proportion  of,  232; 
when  not  a  disadvantage,  232; 
have  averted  serious  losses,  232. 

Smith,  Adam,  4,  40,  41. 

Smith,  Fred.  A.,  paper  on  "When 
to  Let  Go  of  an  Old  Customer," 
272,  273. 

Speculation,  28,  29,  31,  56,  105, 
109. 

State  bankers,  associations  of, 
127. 

State,  lines,  limitations,  narrow- 
ness, and  pride,  310;  exemptions, 
315;  treatment  of  creditors  by, 
318,  321;  citizens  of,  securing 
advantages,  318;  creditors  for- 
eign to,  319;  system,  operations 
of,     321;     no     uniformity     of 


360 


CREDIT  AND  ITS  USES 


statutes,  321 ;  statutos  on  bank- 
ruptcies and  insolvencies,  321; 
government,  features  of,  322. 

State  government,  closer  to  the 
people  than  national  govern- 
ment, 308. 

State  laws,  expenses  of  administer- 
ing estates  under,  291;  recourse 
to,  298;  suspended  by,  300;  in 
operation,  307;  why  preferred, 
308;  assignments  under,  309; 
diversity  in,  315;  encourage 
preferences,  318;  in  the  interests 
of  home  creditors  318;  absolute- 
ly uniform,  321;  have  no  extra- 
territorial effect,  321;  diversity 
in,  described,  321,  322. 

Statements,  banks  ask  for,  127; 
attitude  of  traders  toward,  128; 
businesslike  character  of,  134; 
failure  to  make  out  correctly, 
134;  required  by  banks  at  least 
once  a  year,  140;  comparative, 
140;  safest  method  of  obtaining 
information,  181;  signed  in 
person  by  applicant  for  credit, 
181;  great  merit  of,  181;  failure 
to  respond  to  questions  upon, 
182;  veiling  unsatisfactory  de- 
tails in,  182;  personal,  182;  large 
number  of  questions  on  confus- 
ing, 182;  New  York  legislation 
affecting,  182;  no  uniform  policy 
in  asking  for,  183;  men  not  in- 
clined to  give,  183;  advantage 
of  using,  183;  analyzing,  184, 
229;  exempt  property  shown  in, 
184;  useless  to  solicit  from  cer- 
tain classes,  199;  practice  of 
giving  more  general,  199;  cle- 
ment of  character  in,  222;  ques- 
tion as  to  expenses  in,  233;  too 
brief  in  form.  234;  question  as 
to  rent  in,  234;  question  as  to 
fire  insurance,  247. 

States,  bankruptcy  and  insol- 
vency systems  of,  300;  legislate 
in  the  interests  of  creditors,  321; 
uniform  law  adopted  by,  321; 
no  disposition  to  legislate  on 
uniform  lines,  321;  no  two  have 
same  system,  321. 


States'  rights,  political  element, 
306;  against  curtailment  oi 
prerogatives  of  States,  307;  pre- 
venting passage  of  national 
bankruptcy  act,  307;  differenti- 
ation between,  and  Federalism, 
308;  liberties  of  people  best 
nurtured  by,  308. 

States'  rights  theory,  student  of, 
321. 

Study  of  credit,  the,  has  been 
stimulated,  338;  not  a  separate 
feature  in  courses  of  com- 
merce, etc.,  338;  division  of  de- 
partment of  political  economy, 
338. 

Subvention,  59. 

Supreme  Court  of  the  United 
States,  appeals  to,  304;  decis- 
ion in  Sturgis  vs.  Crowninshield, 
307. 

Suspended  accounts,  description 
of,  292;  separate  branch  of 
credit  work,  293;  treatment  of, 
293;  card  systems  and,  293; 
docketing  information,  293;  at- 
tention given  to,  293;  results 
realized  from,  293. 

"System  for  a  Bank's  Credit  De- 
partment, A,"  article  by  H.  H. 
Sanger  on,  260. 

System,  not  a  complete  bar  to 
losses,  123;  important  factor  in 
business  management,  252;  nec- 
essary in  credit  work,  252. 

Tappan  &  Douglass,  193. 

Tappan,  Lewis,  organized  first 
mercantile  agencj',  192;  other 
enterprises  followed,  194. 

"The  Bond  Issues"  ("Presidential 
Problems"),  77. 

"The  Credit  System  in  France, 
Great  Britain,  and  the  United 
States,"  9, 18. 

"The  Loan  and  Credit  Depart- 
ment," article  by  William  Post, 
222. 

"The  Methods  of  Banking,"  196. 

"The  Theory  of  Credit,"  9. 

"The  Trust  Problem,"  65. 

"The  Way  to  Wealth,"  285. 

Thornton,  Heniy,  8,  44,  45. 


INDEX 


361 


Tocqueville,  Alexis  Charles  Henri 
Clerel  de,  remarks  on  bankrupts 
in  the  United  States,  309. 

Toledo,  Ohio,  335. 

Trade  agencies,  a  development  of 
the  cooperative  theory,  206. 

Trade  bureaus,  reasons  for,  206; 
organized  by,  207. 

Trade  organizations,  collecting 
accounts,  282;  collection  letters 
used  by,  282,  284;  svstems  in 
use  by,  282,  284;  bulletins  of 
delinquent  debtors,  284. 

Traveling  credit  representatives, 
represent  advanced  form  of 
credit  work,  186;  necessity  for, 
186;  visiting  all  classes  of  trade, 
186;  relation  to  credit  investi- 
gations, 187;  work  of,  187; 
thorough  schooling  in  credit 
work  required,  187;  must  have 
general  knowledge  of  accounts, 
187;  understandmg  character- 
istics of  customers,  187;  making 
an  examination  of  books,  187; 
examining  merchandise,  187; 
investigate  among  banks,  etc., 
188;  advantages  to  a  house  of, 
188;  work  in  which  most  effica- 
cious, 188;  character  of  reports, 
201. 

Trustees  in  bankruptcv,  under 
Act  of  1898,  304,  317;  elected  by 
creditors,  317;  when  appointed 
by  referee,  317;  must  furnish 
bonds,  317. 

"Two  Years  of  the  Federal  Bank- 
ruptcy Law,"  article  on,  by 
William  H.  Hotchkiss,  312. 


Uncertain  events,  defined,  325 
loss  in  credits  depending  on,  325 

Uncollectible  accounts,  90. 

Union,  greenbacks  issued  by,  77 
interests  of,  306. 

United  States,  failures  in,  225 
bankruptcy  legislation  in,  299 
300;  first  bankruptcy  law,  301 

Utopian  stage,  31. 


Venezuela,  obli|Tated  to  pay,  79. 

Voluntary  bankruptcy,  first  in- 
troduced in  America,  303;  pro- 
vided for  in  Act  of  1898,  314. 


War,  financial  aid  for,  68;  expen- 
ditures, 69;  Russo-Japanese,  70; 
modern  cost  of,  70;  munitions 
of,  99. 

Warehouse  receipts,  42. 

"Ways  and  Means  of  Payment," 
16. 

Wealth,  use  of,  5;  a  merchant's, 
104. 

"Wealth  of  Nations,"  4. 

"When  to  Let  Go  of  an  Old  Cus- 
tomer," paper  by  Fred.  A. 
Smith  on,  273. 

Whigs,  political  party,  306. 

Withdrawals,  by  partners,  131. 

World's  Mercantile  Congress,  June 
19-26, 1893,  334, 335;  announce- 
ment of,  334;  questions  proposed 
for  discussion,  334;  committee 
to  organize  national  association, 
334. 

Written  references,  128. 


(IS) 


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